JKX Oil & Gas plc
2017
Annual Report
JKX Oil & Gas plc Annual Report 2017
In this report
Strategic report
How we performed this year
Our Business
Chairman’s statement
Market overview
Acting Chief executive’s statement
Our business model
2018 strategic objectives and KPI’s
Regional operations update
Reserves and resources
Performance in 2017
Financial review
Corporate social responsibility (CSR) review
Principal risks and how we manage them
Governance
Board composition
Corporate governance
Audit Committee Report
Directors’ Remuneration Report
Directors’ report – other disclosures
Financial statements
Group
Independent Auditors’ Report
Consolidated income statement
01
02
04
06
10
12
14
16
20
22
24
27
32
42
44
53
61
74
78
85
Consolidated statement of comprehensive income 86
Consolidated statement of financial position
Consolidated statement of changes in equity
Consolidated statement of cash flows
Notes to the consolidated financial statements
Company
Independent Auditors’ Report
Company statement of financial position
Company statement of changes in equity
Notes to the Company financial statements
87
88
89
90
126
131
132
133
1
JKX Oil & Gas plc Annual Report 2017
STRATEGIC REPORT
How we performed this year
Update:
2017 has been another difficult year for JKX with further changes
in the Board and senior leadership teams. The new Board, appointed
at the end of 2017, is reassessing the company strategy based on its
assessment of the current situation and prospects ahead.
page 13
Revenue
Profit/(loss) from operations
before exceptional charges
Loss for the year
$76.4m
2016: $73.8m
$7.8m
2016: $(4.0)m
$(17.7)m
2016: $(37.1)m
Cash generated from operations
Cash flow from investing activities
Total year-end cash
$15.7m
2016: $17.0m
$(16.0)m
2016: $(6.2)m
$7.4m
2016: $14.3m
Outlook:
• Move forward with implementing our production enhancement
plan in Ukraine
• Restart drilling on our Elizavetovskoye field in Ukraine
• Systematically review opportunities for acquisition and new
licensing in Ukraine
• Prepare workover plan in Russia
• Disposal of our assets in Hungary and Slovakia
pages 4 and 11
2
JKX Oil & Gas plc Annual Report 2017
STRATEGIC REPORT
Our Business
What we do
JKX is an oil and gas exploration and
production company focused on central
and eastern Europe.
Where we operate
MOSCOW
Russia
KIEV
Ukraine
POLTAVA
Elyzavetivske
Novomykolaivske Complex
Slovakia
Hajdunanas
Hungary
Koshekhablskoye
MAIKOP
Black Sea
C
a
s
p
i
a
n
S
e
a
3
JKX Oil & Gas plc Annual Report 2017
Group statistics
Licenses
Ukraine
Russia
Hungary
Slovakia
Group
1. Ignativske
1. Koshekhablskoye
1. Emod V
1. Svidnik
17 licences
2. Elyzavetivske
3. Rudenkivske
2. Tiszavasvari IV
2. Medzilaborce
3. Hajdunanas IV
3. Snina
4. Novomykolaivske
4. Hajdunanas V
4. Pakostov
5. Movchanivske
6. Zaplavska
5. Pely I
6. Jaszkiser II
Total licence area, sq. km
405
33
200
400
1,037
Stage
Production
2017 gas production, mmcf/d
2017 oil production, bopd
2017 total production, boepd
Reserves
2P reserves, mmboe
3P reserves, mmboe
2C resources, mmboe
Staff
Exploration
Appraisal
Development
Production
Appraisal
Development
Production
Exploration
Appraisal
Production
Exploration
Exploration
Appraisal
Development
Production
16.7
719
3,507
23.3
37.2
90.9
395
29.8
55
5,019
71.7
123.4
74.8
204
0.7
9
131
0.0
0.3
0
47.2
784
8,658
95.1
160.6
166.0
615
4
JKX Oil & Gas plc Annual Report 2017
STRATEGIC REPORT
Chairman’s statement
“ The Board strives to make sure that the
voices of all our shareholders, big and small,
are heard and taken into account in our
strategy and actions.”
The Board has identified the following as immediate
areas of focus:
1. Restoring a constructive relationship with the
shareholders of the Company;
2. Ensuring full operational and financial alignment
between all companies of the Group;
3. Operational risk management developing existing fields
with proven, low risk technology;
4. Ensuring financial stability by building liquidity
reserves, reducing debt and keeping tight control over
cost;
5. Resolving outstanding tax issues.
Dear shareholder, as you are aware, 2017 has been another
difficult year for JKX with disappointing results and further
changes in the Board and senior leadership teams.
The new Board, appointed at the end of 2017, inherited a company
with significantly depleted cash balances, risk management
and control systems that had failed to anticipate or address the
challenges that 2017 presented and the need for a new strategy.
In the light of this difficult scenario the new Board is reassessing
the Company strategy based on its assessment of the current
situation and prospects ahead.
Relationship with shareholders
The Board strives to make sure that the voices of all our
shareholders, big and small, are heard and taken into account
in our strategy and actions. We seek an active and open
communication with all shareholders while at the same time
emphasising the independent role of the Board. All decisions are
taken in the interest of the Company as a whole.
As a further step to manifest our approach, our two major
shareholders - Eclairs Group Limited (“Eclairs”), which owns
27.54% of our shares and Proxima Capital Group (“Proxima”),
which owns 19.97% of our shares - now both have nominees on
the Board, indicating a new sense of confidence, alignment and
shared focus.
Ensure full operational and financial alignment between all
companies of the group
The Board is currently reviewing key processes to ensure they are
harmonised throughout the Group and that learnings are shared
on a Group wide basis. Procedures for investments (Capex) and
operations (Opex) are now measured against Group wide criteria
for risk, financial reward and timing. Whilst there is more work
to do, interim financial controls have been introduced to ensure
that all material expenditure is subject to centralised approval. In
the current situation projects with short payback period and low
risk are prioritised.
Focus on operational risk management developing existing
fields step by step with proven, low risk technology
In 2017, the Company set out to unlock its reserves potential.
Key to this strategy was our Rudenkivske gas fields in Ukraine.
The results were disappointing whilst significantly depleting
cash balances. To make the best use of available resources, the
Company will in the near future concentrate on proven low risk
technologies to achieve incremental production increases from
each well while keeping the investment for each project at a
minimum. This will allow us to spread the risk over many wells,
both own wells and leased wells. New technologies and larger
projects will be considered when the Board is comfortable with
the risks involved, the project meets established criteria and is
also acceptable from a cash outlay point of view. Better utilization
of the capacity of the existing plants will be another area of focus.
Ensure financial stability by building liquidity reserves,
reducing debt and keeping tight control over costs
On June 30, 2017 the unrestricted cash of the group was at $4.0
million compared to $14.1 million on December 31, 2016. This
abrupt decrease was mainly due to $10.4 million spent on capital
expenditures in the first half of 2017 ($2.5 million in the first half
of 2016) and payments to bondholders in February 2017.
The Board and the new executive team (which includes a new
CFO with relevant regional, technical and language skills) are
now focussed on using the group’s positive operating cashflow to
pay off the remaining debt on schedule and consolidate our cash
reserves through:
5
JKX Oil & Gas plc Annual Report 2017
1.
Strengthening control over costs and future spending, and
2. Eliminating unnecessary contracts and enhancing
procedures and discipline in entering into new ones.
PPC by a court in Poltava. As a result, the tax notification was
cancelled. The tax authorities’ appeal against the decision was
dismissed. The tax authorities have lodged another appeal
with the Supreme Court.
Our unrestricted cash on hand increased to $6.9 million on
December 31, 2017 and all planned payments to bondholders were
successfully made in February 2018, thus repaying a third of the
capital outstanding on the bonds on schedule.
2.
PPC has received a claim for underpayment of royalty for
2015. The claim, including interest and penalties, amounts
to approximately $25.8 million. The tax notification was
subsequently cancelled. The case is still being contested in
court.
3. PPC was awarded approximately $12.1 million by the Hague
international tribunal in 2017. In response, the Government of
Ukraine submitted an appeal to the UK High Court which was
dismissed.
The Company will continue to defend its position in local courts.
Given the materiality of these tax liabilities we have considered
the risk to the Group’s ability to continue as a going concern
further in Note 2 to the financial information. Additional detail
on tax litigation cases is provided in Note 27 to the financial
information.
Outlook
Ukraine and Russia will remain our main areas of operation.
The Board and management will devote full attention to our
assets in these countries.
In Ukraine, we expect to stabilize and, shortly, to increase
production and take advantage of the favourable market
conditions. We will increase the use of leased wells and stimulate
the production from our own wells through the implementation
of the revised workover program. This is a low risk undertaking
consisting of numerous smaller steps to better utilize existing
well stock and to drill at least one new infill well.
In Russia we will enhance our technical capabilities and broaden
our work with drilling companies and other existing and new
contractors to ensure the highest level of technical efficiency. The
goal is to enhance our capabilities so as to complete future well
workovers on budget and on time.
We see a gradually improved cashflow through the second half of
2018 as the revised strategy starts to yield results. This includes
an unrelenting focus on internal control and cost optimization.
People
JKX has gone through significant Board and management change
on two occasions in the past two years – a remarkable challenge
by itself and especially considering the operating environment it
has had to navigate. I would like to thank JKX’s staff for ensuring
continuity and smooth operations in times of change and for their
continued faith in the Company.
Finally, I would like to thank Victor Gladun, who took over as
Acting CEO in June 2017 and has now returned to his role as
General Director of PPC, Dmitriy Poddubny who served as acting
CFO during the latter part of 2017, and Ben Fraser, our new CFO,
for stepping up and shepherding the Company through turbulent
times towards future success.
The Company’s Ukrainian subsidiary, Poltava Petroleum
Company (“PPC”), has secured a standing credit line of
approximately $5.3 million and the Russian subsidiary, YGE,
is in negotiation for another standing credit line.
More effective governance
We have made a significant effort to create a culturally diverse
and widely experienced Board consisting of individuals with
knowledge and skills in each of the key areas of risk for the
Company - technical and engineering, finance and controls, and
funding and capital markets. Additionally, all of your Directors
have significant experience of operating in Ukraine or Russia -
key markets for JKX.
In the current circumstances, the Board has not yet been able
to recruit the full executive team needed to resolve the many
issues your Company faces. The Board has therefore, as an
interim measure, deployed its range of skills and experience
and is playing an unusually active role in the management and
leadership of the Company, with the General Directors of the
operating companies reporting on all matters directly to the
Chairman of the Board.
We believe that the current composition of the Board, and in
particular the highly experienced independent Directors that
have recently joined the Board, will help the Company navigate
this difficult period whilst reinforcing our strong commitment to
Board independence. In addition to the non-executive Chairman,
the number of independent directors has been increased from
2 to 3, while the number of non-independent directors has been
reduced from 4 to 3.
System of internal controls
The current Board, together with the Audit Committee, has
carried out a risk-based review of the effectiveness of the
Company’s internal control and risk management systems and
has introduced a number of interim measures to strengthen them.
This work is ongoing.
Specifically, a breakdown in controls occurred in the Company’s
Ukrainian subsidiary during 2017. Several legal advisers were
engaged without a proper transparent tender process. These
advisers were paid legal fees of approximately $1 million, for
which there is a lack of documentation supporting the nature
and extent of work performed. As a result, the Audit Committee
appointed KPMG to conduct a forensic examination of the process
for appointment of legal advisers in Ukraine, the manner in
which these specific payments were made and to investigate the
nature of such payments and services provided. As at the date of
this release, KPMG’s investigation has recently been concluded
and management has already implemented certain of the
recommendations provided in their report.
Resolving outstanding tax issues
The Company has three material unresolved tax issues:
1. PPC has received a claim for underpayment of royalty for
2010. The claim, including interest and penalties, amounts to
approximately $11.3 million. The claim is currently not being
pursued due to a finding on technical grounds in favour of
Hans Jochum Horn
Chairman
6
JKX Oil & Gas plc Annual Report 2017
STRATEGIC REPORT
Market overview - Ukraine
Why are we here?
Throughout the history of JKX, Ukraine has remained our most
important country of operation from a cash flow stand point.
Because a large share of its energy needs is imported, Ukraine
is one of the most attractive markets for hydrocarbons in
the world.
Despite a dramatic reduction in gas consumption from as much
as 110 bcma in 1991 to just 32 bcma in 2017, Ukraine remains
Europe’s sixths largest gas market. During the same period,
domestic gas production has remained at the level close to
20 bcma, with the remainder imported (see Ukraine's Gas
Balance 1991-2017 table below).
Over the past decade private gas producers like JKX, have
enjoyed a significant premium to gas prices elsewhere in Europe,
let alone other regions such as North America (see Ukraine's gas
price premium below). Historically, the reason was that prices
for the industrial sector that private gas producers supply was
set based on the terms of the gas contract between Russia and
Ukraine, which in turn was closely linked with the price of oil.
After Ukraine established alternative routes for gas imports
from Europe (completely stopping commercial gas imports
from Russia in 2016), Ukraine’s price for gas has been based
on European gas hub prices plus the (often very significant)
additional cost of shipping gas from Europe to Ukraine.
A premium to European gas prices is likely to persist in
the future.
Our oil and LPG sales also tend to enjoy a premium over main
European markets. Here again the price tends to be set by the
marginal imported barrel. As a result, Ukrainian netbacks for
all our products have been healthy.
Meanwhile, the attractiveness of Ukraine as a destination for
investors in gas production has recently increased further.
In December 2017 the government of Ukraine took its first
concrete step towards realizing its strategic goal of energy
independence by significantly reducing royalty on new gas
wells. Starting in January 2018 at least for a five year period
the royalty on new gas wells was reduced from 29% to 12%
for wells shallower than 5000 meters and from 14% to 6% for
wells deeper than 5000 meters. Deregulation of the upstream
industry started in 2017 and is expected to pick up in 2018.
Reforms aim to simplify and modernize Ukraine’s regulatory
regime, making the permitting process easier and cheaper.
Ukraine's gas balance 1991-2017 (bcm)
150
120
90
60
30
0
-30
500
400
300
200
100
0
Imports from Russia
Imports from Central Asia
Domestic production
Imports from Europe
Exports
0
9
9
1
1
9
9
1
2
9
9
1
3
9
9
1
4
9
9
1
5
9
9
1
6
9
9
1
7
9
9
1
8
9
9
1
9
9
9
1
0
0
0
2
1
0
0
2
2
0
0
2
3
0
0
2
4
0
0
2
5
0
0
2
6
0
0
2
7
0
0
2
8
0
0
2
9
0
0
2
0
1
0
2
1
1
0
2
2
1
0
2
3
1
0
2
4
1
0
2
5
1
0
2
6
1
0
2
7
1
0
2
Source: Energobusiness; Company Research
Ukraine's gas price premium ($/Mcm)
Ukraine
TTF
Henry Hub
2009
2010
2011
2012
2013
2014
2015
2016
2017
Source: Company Research
7
JKX Oil & Gas plc Annual Report 2017
Netback
Netback analysis of gas sales (at $6.72/Mcf in 2017
and $5.92/Mcf in 2016)
$1.12 (21%)
$1.58 (27%)
$3.12 (52%)
2017
2016
$1.18 (18%)
$1.80 (27%)
$3.74 (55%)
Production costs
Production taxes
Net
Netback analysis of oil sales (at $64.26/bbl in 2017
and $45.94/bbl in 2016)
$7.29 (16%)
$17.87 (39%)
$20.78 (45%)
2017
2016
$7.08 (11%)
$17.2 (27%)
$39.96 (62%)
Production costs
Production taxes
Net
JKX’s business assets in Ukraine
D N I E P E R - D O N E T S
B A S I N
Kiev
Ukraine
Elyzavetivske
Novomykolaivske
Complex
Russia
Black Sea
Novomykolaivske Complex
Our Novomykolaivske Complex
reserves comprise five distinct fields
producing in to one GPF. In addition
we have a Liquefied Petroleum Gas
(‘LPG’) facility which converts some
of our gas into LPG for sale into the
expanding Ukrainian market.
Elyzavetivske field
Our Elyzavetivske field and
GPF, which are 45km from our
Novomykolaivske Complex, began
commercial production in 2014.
The field currently produces from
three wells.
Ukrainian reserves
At the end of 2017, our 2P reserves
in Ukraine comprised 120.4 Bcf of
gas and 3.2 MMbbl of oil (total 23.3
MMboe).
Project life cycle
Reserves
Novomykolaivske Complex
Reserves split
23 years
of commercial production to date
86% gas
14%
1994
2017
2032
86%
Gas
Oil
Movchanivske
Ignatativske
Novomykolaivske
Rudenkivske
Zaplavska
Elyzavetivske field
4 years
of commercial production to date
1995
2017
2023
Principal risks associated with our business
in Ukraine (detail on page 32-40)
Liquidity, funding, and portfolio management
Commodity prices and FX fluctuations
Reservoir and operational performance
A
H
C
8
STRATEGIC REPORT
Market overview - Russia
Why are we here?
Russia is one of the global gas industry’s most important players.
It boasts the world’s largest natural gas reserves and is the
second largest producer of gas in the world after the United
States. It is also second after the US in natural gas consumption.
On the other hand, enormous investments in gas production and
transportation made by Gazprom over the past decade coupled
with lower than expected gas demand growth in Europe and
Russia have led to excess gas available in Russia. Gas prices are
significantly lower than those in international markets, due to
Russia’s approach to industry regulation.
Nevertheless, our project enjoys several important advantages
over competitors. Our Koshekhablskoye field is located in the
autonomous republic of Adygeya in southern Russia. This is the
region of Russia that enjoys one of the country’s highest gas
prices. This is because the gas industry’s key reference price -
regulated price for industrial consumers set for Gazprom - is
set based on distance from Russia’s key gas producing region -
Nadym-Pur-Taz (NPT) in the far north. Adygeya is located more
than 4000 km away from NPT and, as a result boasts the highest
gas prices of all regions in Russia connected to Gazprom’s
pipeline system (see Russia's regional gas pricing below).
In addition, due to the depth of main production horizons at
our field, Koshekhablskoye enjoys a significant production tax
break compared to other producers.
Despite Russia’s overall gas surplus, Russia’s southern regions
are short of gas with consumption exceeding production by
more than three times. While Russia’s average gas consumption
has stagnated in recent years, Russia’s southern regions such as
Krasnodar have continued to grow (see South Russia gas supply
and demand chart below).
Southern Russia also boasts excellent infrastructure with easy
access to roads and other infrastructure. Gazprom’s gas pipeline
system is highly developed in the region, with the main gas
pipeline passing less than a kilometre from our gas plant.
Russia's regional gas pricing
(Rub/Mcm)
Population
Industry
(Min)
Industry
(Max)
KhMAO
Chelyabinsk
Samara
Moscow
Adygeya
2,908
3,483
3,531
3,631
3,680
2,929
3,871
4,074
4,540
4,634
3,222
4,258
4,481
4,994
5,097
Netback
South Russia gas supply and demand (Bcm)
Southern Russia netback analysis gas (at $1.69/Mcf in
2017 and $1.49/Mcf in 2016)
$0.91 (53%)
$0.17 (10%)
$0.62 (37%)
$0.72 (48%)
$0.13 (9%)
$0.64 (43%)
2017
2016
Production costs
Production taxes
Net
80.0
70.0
60.0
50.0
40.0
30.0
20.0
10.0
0.0
18.3
Supply
Gas production
Gas export
Gas consumption
Source: Company Research
13.1
53.9
Demand
JKX Oil & Gas plc Annual Report 2017 9
JKX’s business assets in Russia
Ukraine
Rostov-on-Don
Russia
Krasnodar
Koshekhablskoye
Maikop
R E P U B L I C
O F A DY G E A
Black Sea
Koshekhablskoye field
Koshekhablskoye gas field is located
in the Republic of Adygea, southern
Russia where gas resource is scarce,
and there are high transportation
costs from Russia’s main gas
production area in the far north,
some 4,000 km away.
Russian reserves
At the end of 2017, our 2P reserves
in Russia comprised of 425.9 Bcf of
gas and 0.7 MMbbl of oil (total 71.7
MMboe).
Koshekhablskoye
project life cycle
Reserves
Total project life cycle
Reserves split
5 years
of commercial production to date
99% gas
1%
2012 2017
2048
99%
Gas
Oil
Principal risks associated with our business
in Russia (detail on pages 32-40)
Geopolitical and fiscal risks
Reservoir and operational performance
B
C
JKX Oil & Gas plc Annual Report 2017
10
STRATEGIC REPORT
Acting Chief Executive’s statement
"Since the arrival of the new senior
management team and the new Board,
we have significantly revised our field
development plans in Ukraine”
Management was also able to achieve results that
bode well for the future:
•
•
In Ukraine a new field development program designed
to enhance production from our core fields and
engage in low-risk appraisal has been designed and its
implementation has begun;
In addition, we received access to 14 wells owned by
state companies on our licenses;
• We restarted production in Hungary after more than a
three-year break and sustained production throughout
the year;
•
Finally, the Company continued to optimize its cost
base, reduced its overall debt (through repayment of
its bond obligations) and made progress in its legal
proceedings with Ukraine.
2017 was another challenging year for JKX. Lack of positive
results following the first stage of the Rudenkivske field
fracturing programme and delays in the workovers of two wells
in Russia have resulted in an overall production decline for the
group of 14.1% from 10,083 boepd in 2016 to 8,658 boepd in 2017.
As a result of the operational difficulties, the Company also went
through major changes to senior management and the Board of
Directors in the second half of the year.
At the same time, on the back of rising oil and gas prices group
revenue was up by 3.5% year on year from $73.8m to $76.4m,
while operating loss for the year decreased by 62% from
($34.8m) to ($13.2m).
Ukraine
In Ukraine, overall production for the year was down by 12%.
Gas production was down by 10% from 18.6 MMcfd in 2016 to
16.7 MMcfd in 2017, while oil production fell down by 20% from
902 boepd in 2016 to 719 boepd in 2017. Due to the increased
price for oil and gas, our revenue was up by 4.0% (from US$54.8
to US$57.0 million) compared to 2016.
One of the key contributing factors to the decline in production
was a focus on the ultimately unsuccessful first stage of the
Rudenkivske field fracturing program during the first half
of the year. Following the fracturing of four Soviet-era wells,
which resulted in mostly water production, an extensive review
resulted in the key conclusion that a significant amount of
geological work is still required to understand this complicated
reservoir before further significant expenditure can be
justified.
On the positive side, we were able to secure access to 14 old wells
that belong to Ukrainian state companies located on our licenses
thereby creating opportunities to generate low-cost production
through workovers in the future.
Our technical team in Ukraine, which underwent significant
changes during the second half of the year, has refocused on
our core producing fields and generated a new production
enhancement program. Early results have been promising. After
carrying out several successful workovers, the Company has
returned to drilling after an almost three-year break.
Russia
In Russia, our year-on-year gas production was down by 18%
from 36.1 MMcfd in 2016 to 29.8 MMcfd in 2017. Our revenue
was down by 7.4% (from US$19.0 million to US$17.6 million). The
key reason for the decline was delays in two well workovers. The
planned production tubing replacement workover at Well 25
was significantly delayed due to a fire on the workover rig and
the time required by the rig operator to procure the necessary
equipment replacement. As a result, the well was offline for four
months.
The workover of well 5 has also not gone as planned.
Replacement of damaged tubing at the well took longer than
expected and production has not started. A side-track will now
have to be performed once a new rig can be secured.
Hungary
In 2017, we relaunched our production at the Hajdunanas field
in Hungary for the first time in more than three years. The
sidetrack of well Hn-2 was completed in January 2017 and gas
sales began in February. This was followed by a successful
workover of well Hn-1 completed in October. As a result, in
2017 average gas production was 0.7 MMcfd, while average
condensate production was 12.5 bpd. The Group is now pursuing
a full divestment of its remaining Hungarian licence interests
due to the refocus on its operations in Ukraine and Russia.
JKX Oil & Gas plc Annual Report 2017 11
Slovakia
In Slovakia repeated delays to the drilling plans of the operator
(Alpine Oil & Gas) have been caused by local protestors and lack
of cooperation from authorities at both central and local levels.
As a result, all project partners have been considering their
future options. In early February 2018 the Board made a decision
to withdraw from Slovakia.
Outlook
Since the arrival of the new senior management team and the
new Board, we have significantly revised our field development
plans in Ukraine.
Our plan for 2018 includes significant activity in Ukraine
to boost production in our core fields and engage in low risk
appraisal. This includes 12 workovers, 4 side-tracks and one new
well. We plan to take advantage of the access we have gained
to state-owned wells located on our licenses to target low-cost
production enhancement opportunities. Our main development
targets are production enhancement through evaluation of
clastic reservoirs in the western part of the Ignativske field,
infill drilling at the Elyzavetivske field, appraisal of the West
Mashivske area of the Elyzavetivske license, and testing the
deep Devonian horizons at our Movchanivske field.
Our approach to the development of the Rudenkivske field has
changed significantly. The new field development plan now
targets the Devonian horizons in the southern section of the
field. This is where the Company was able to achieve the best
results to date (wells R12 and R103) and where target depths
are relatively shallow. Overall, compared to the previous
Rudenkivske field development plan, the number of target wells
and fracture stages have been significantly reduced.
Our plans in Ukraine are in part underpinned by significant
reductions to royalty rates for new gas wells. Starting from
January 1, 2018, new gas wells shallower than 5000 meters
are taxed at the rate of 12% (instead of 29%). In addition, the
recent passage of legislation that significantly deregulates the
upstream industry gives us confidence that the Government of
Ukraine is more supportive of new investment in gas production
than before.
In Russia, we plan to contract a new workover rig for future
operations and to complete a side-track of well 5 at our
Koshekhablskoye field. Longer term our goal here is to increase
production to the maximum operating capacity of our gas plant
(60 million cubic feet per day).
Finally, I would like to thank our staff at all offices for their hard
work during what was a very difficult period for JKX. I am proud
of their commitment to our company and honoured to lead them
during tough times. I am now confident that if we continue to
persevere, together we will succeed in returning JKX to growth
and financial success.
Victor Gladun
Acting Chief Executive Officer
JKX Oil & Gas plc Annual Report 2017 12
STRATEGIC REPORT
Our business model
We strive to create value to our stakeholders
by investing in exploration for, appraisal and
development of oil and gas assets in Central
and Eastern Europe.
We generate revenue from production and
sales of oil, gas, condensate and LPG. Cash
flow generated from sales is distributed to our
stakeholders and reinvested in our business.
$ Cash is distributed among our stakeholders
Exploration
Appraisal
Government
Suppliers
Asset life
cycle
Stakeholders
Investors
Employees
Production
Development
Local community
$ Cash is invested in existing and new assets
We manage a portfolio of assets in Russia, Ukraine, Hungary, and Slovakia.
We aim to evaluate where we can add the most value and manage our portfolio accordingly.
Exploration
We use highly experienced in-house and contracted technical staff
to help us identify exploration targets both within our portfolio and
elsewhere. However, exploration activity is currently not what we are
focused on.
Appraisal
A large number of legacy wells are located in and around the area of
the mature assets operated by JKX. Dedicated efforts to gain access
and evaluate valuable data from these wells allow JKX to greatly
reduce risks and costs of its appraisal activities and optimize further
development planning.
Development
We strive to manage our field development based on ‘what’s possible’
in petroleum engineering, physics and execution.
Production
JKX has engaged experts in latest drilling, completion, and engineering
technology from countries we operate in and abroad. Although
production decline is a characteristic of oil & gas assets, we strive to
minimize decline within our mature fields by identifying and executing
production enhancement and workover opportunities.
Government.
Payments to government include production, payroll, corporate, VAT,
land, utility, licensing and other taxes and fees. Through payment of
taxes and fees we support local and national economies.
Suppliers
Payments to suppliers are made for equipment, materials and services.
Where possible, we purchase local goods and services and develop
infrastructure that benefits entire community. However, using new
technologies proven internationally is important for maximizing
returns from investing in and developing our assets.
Employees
We provide jobs in developed, emerging and developing economies,
creating local purchasing power and improving standards of living.
Local community
We support local communities through providing both funding and staff
time and commitment to charitable causes in Ukraine and Russia
Investors
We deploy capital provided by our investors, including bondholders and
shareholders, and aim to realize attractive return on investments while
adhering to our all commitments.
JKX Oil & Gas plc Annual Report 2017 13
STRATEGIC REPORT
2018 Strategic objectives
New board
After the last AGM on 30 June 2017, almost the entire Board of JKX has changed. The new Board
has a different vision and ideas on how to restore shareholder value at JKX. Therefore, through the
second half of 2017 and beginning of 2018, JKX’s strategy, its strategic priorities and performance
measures were changing from those defined by previous management and documented in the 2016
Annual Report.
Strategic priorities
Our objective is to be one of the leading independent upstream exploration and production companies in
central and eastern Europe and enhance shareholder value by increasing oil and gas production and cash
flow through safe and responsible operations.
Our strategic priorities are:
Financial and operational stability.
The Company’s liquidity decreased in 2017 putting an emphasis on building a liquidity reserve,
strengthening governance and controls, and decreasing operational, technical, and subsurface risks.
Profitable production growth.
Our future production profile underpins the value of the Group. Our production is limited by the
performance of our reservoirs and by the processing capacity of the Processing Facilities at our
fields. Longer-term, we need to grow our reserve base and hence production through either successful
exploration and appraisal activities within our existing assets, or through acquisition of new ones.
Operating safely and responsibly.
We work in environments that are challenging and hazardous by nature. As well as operating efficiently,
it is vital that we also operate safely and responsibly. Our behaviour impacts on our employees, our
shareholders, the wider community and the environment. Our performance in the society in which we
operate, and the environment, are a critical part of measuring our overall performance.
JKX Oil & Gas plc Annual Report 2017 14
STRATEGIC REPORT
2018 Strategic priorities and KPI’s
Strategic priority
Strategic priority
1
Financial and operational stability
2
Profitable production growth
Key activities planned 2018
Key activities planned 2018
• Establish a liquidity reserve through maximizing the cash
• Resume drilling in Ukraine
flow and access to external funding
• Review and improve internal governance and control
procedures
• Focus on low-risk investments and use of proven
technologies
• Review other growth opportunities in our key markets
• Optimize workover program in Russia
Performance measures
Performance measures
Cash generated from
operations, $ million
Liquidity (cash on hand and
undrawn facilities), $ million
Production volumes, boepd
EBITDA per boe,$per boe
17.0
15.7
12.8
20
15
10
5
0
26.3
30
25
20
15
10
5
0
12000
10000
8000
8,996
10,083
8,658
14.3
7.4
6000
4000
2000
0
10
8
6
4
2
0
8.0
5.1
4.3
2015
2016
2017
2015
2016
2017
2015
2016
2017
2015
2016
2017
Associated principal risks
Associated principal risks
(detail on pages 32 to 40)
Liquidity, funding, and portfolio management
Financial discipline and governance
A
D
(detail on page 32 to 40)
Geopolitical and fiscal risks
Reservoir and operational performance
Commodity prices and FX fluctuation
B
C
H
JKX Oil & Gas plc Annual Report 2017 15
Strategic priority
3
Operating safely and responsibly
Key activities planned 2018
• To exceed internal and industry targets for AIFR, LTI,
and EIFR
Performance measures
All Injury Frequency Rate (‘AIFR’)
Lost Time Injuries (‘LTI’)
Environmental Incident
Frequency Rate (‘EIFR’)
0.14
0.15
0.12
0.09
0.06
0.03
0.00
0
0
0.15
0.12
0.09
0.06
0.03
0.00
0
0
0
0.35
0.32
0.29
0.35
0.30
0.25
0.20
0.15
0.10
0.05
0.00
2015
2016
2017
2015
2016
2017
2015
2016
2017
Associated principal risks
(detail on page 32 to 40)
Health,Safety,and Environment
Major breach of business, ethical, or compliance standards
E
G
JKX Oil & Gas plc Annual Report 2017 16
STRATEGIC REPORT
Regional operations update
Group production
In 2017 group average production was 8,658
boepd (2016: 10,083 boepd), comprising of
47.2 MMcfd of gas (2016: 54.7 MMcfd) and
784 bpd of oil and condensate (2016: 967 bpd),
an overall reduction in production of 14%.
The decline in gas production was mainly
attributed to Well 25 being offline in Russia
for 4 months due to a fire on the workover rig.
The remaining drop in gas production was
due to ongoing decline in the Elyzavetivske
field in Ukraine. The reduction in group oil
production was due to the decline of IG132
in the Ignativske field in Ukraine.
Ukraine
Novomykolaivske licences
Production
Average production from the Novomykolaivske group of fields in
2017 was 2,336 boepd (2016: 2,553 boepd) comprising 9.8 MMcfd
of gas (2016: 10.0 MMcfd) and 701 bpd of oil and condensate
(2016: 879 bpd). Despite the disappointing results of the Phase 1
fracturing campaign, gas production only reduced by 2% however
oil reduced by 20%. The gas production during 2017 increased
significantly in the Rudenkivske field due to the successful
workovers of NN16 and NN47 at the end of 2016 which offset
natural production declines in the rest of the fields. The decline in
oil is mainly attributed to the decline of production of IG132.
Development and drilling
No drilling of new wells took place in 2017 as efforts were focused
on delivering the Phase 1 frac project in the Northern part of the
Rudenkivske field during the first half of the year. Enhancements
continued through the year and towards the end of the year the
first drilling related activity since 2014 resulted in the successful
completion of the IG101 Sidetrack using the SMS rig.
Ignativske Field
Average production from the Ignativske field in 2017 was
949 beopd (2016: 1452 boepd) comprising 3.6 MMscf/d (2016:
4.5 MMscf/d) and 358 bopd (2016: 513 bopd). Natural decline
contributed the most to the year on year decline with the
reduction in IG132 having the largest effect on oil ouput. The
following enhancement activities were carried out on wells in the
Ignativske license during 2017:
• An electrical submersible pump (ESP) was installed in IG128 in
May which increased the oil rate from 38 stb/d to 132 stb/d.
At the end of the year the water cut had increased with the well
producing 61 bopd during the last test of the year.
• De-waxing units were installed in IG132 and IG137 during 2017
to reduce downtime by removing the need for regular wax
cutting jobs using slickline.
•
IG101ST was completed at the end of December and was the
first sidetrack of an existing well which has been carried out
by PPC since 2006 and was the first drilling related operation
carried out by PPC since IG140 at the end of 2014. The well
was drilled to test the Tournaisian clastics in a neighbouring
fault block and initial rates were 8.6 MMscf/d and 365 b/d of
condensate.
Ignativske South waterflood project
Water injection continued into IG126 during 2017. In late January
an ESP was installed in IG110 to increase the supply of water from
753 bwpd to 3447 bwpd. An acid job in IG126 further increased the
rate of water injection to 7087 bwpd before problems with sand
production meant that the ESP in IG110 had to be stopped in late
February. Water injection was re-started in July once the pump
had been repaired and a screen had been installed. The water
injection rate averaged 3132 bwpd until after a flow meter check
the ESP could not be re-started in August. A total of 245 Mstb of
water was injected into IG126 during 2017.
Since the start of the pilot water injection in 2012 a total of 1.74
MMstb of water has been injected into IG126 and over the same
period 229 Mstb of oil, 0.74 Bcf of gas and 0.02 Mstb of water
has been produced from two wells in this part of the field. It is
estimated that the incremental production as a result of the
water flood project is 120 Mstb of oil and 0.4 Bcf of gas to date.
The reservoir pressure has increased by 352 psi since the start
of the waterflood project with 140 psi of this pressure increase
JKX Oil & Gas plc Annual Report 2017 17
occurring in the last year indicating that fill up has been
progressing.
production. The well produced a total of 34 MMscf and 681 stb
of condensate.
Due to problems with the water supply for the water injector and
no incremental production achieved during 2017 this project is
to be re-evaluated during 2018 leading to a decision whether to
resume water injection.
• R6 was placed on gas lift in October in an effort to accelerate
clean-up following the fracturing of this well during the first
half of the year. So far to date only minor quantities of gas have
been produced from this well since fracturing.
Movchanivske Field
Average production from the Movchanivske field in 2017 was
685 boepd (2016: 771 boepd) comprising 3.0 MMscf/d (2016: 3.4
MMscf/d) and 181 bopd (2016: 198 bopd). Natural decline was
only partially offset by the enhancements listed below. The
following enhancement activities were carried out on wells in the
Movchanivske license during 2017:
• M202 was placed on gas lift in August which resulted in an
increase in the production rate by 0.2 MMscf/d and 20 bopd and
has enabled consistent production from this well which was
previously only able to produce periodically.
• M166X was re-started in September after having been shut-in
since November 2016 due to only water being produced. This
well produced 3.7 Mstb of oil and 22 MMscf of gas in the second
half of 2017.
• M153 was successfully worked over in September to remove
the packer and deepen the gas lift injection point. This resulted
in an increase in production from 26 boepd to 130 boepd.
• M161-V16 was worked over in November to re-shoot the
current interval with 4 ½” TCP guns. This was an attempt
at increasing the oil rate by reducing the near wellbore skin
damage. The average oil rate in December from this well was 33
bopd up from 25 bopd prior to the workover.
• De-waxing units were installed in M153 and M171 during 2017.
Novomykolaivske Field
Average production from the Novomykolaivske field in 2017 was
356 beopd (2016: 392 boepd) comprising 1.4 MMscf/d (2016: 1.4
MMscf/d) and 129 bopd (2016: 159 bopd). The GOR in two of the
key producers has increased through the year contributing to
the decline in oil rate and stabilisation of the gas production. The
following enhancement activities were carried out on wells in the
Novomykolaivske field during 2017:
• Additional W/L perforations were added in NN80 in September
however no additional gas production was achieved and as
such there were no other interventions on this field in 2017.
Rudenkivske Field
Average production from the Rudenkivske field in 2017 was
346 beopd (2016: 140 boepd) comprising 1.9 MMscf/d (2016: 0.8
MMscf/d) and 33 bopd (2016: 12 bopd). A significant increase in
the production from Rudenkivske occurred in 2017 due to the
successful workovers of the two leased wells NN16 and NN47 late
in 2016. The following enhancement activities were carried out on
wells in the Rudenkivske license during 2017:
• NN16 was placed on gas lift in January 2017 and is still
producing intermittently.
• R10 was abandoned in November due to no significant
quantities of gas production being achieved, from this well,
following the fracturing campaign.
R19 is currently on intermittent production and like R6 has only
produced minor quantities of gas since fracturing.
Rudenkivske Frac Project
During the first half of the year the focus was on delivering
Phase 1 of the fracturing campaign in the Northern part of the
Rudenkivske field. The objective was to de-risk contingent
resources in this part of the field. Four wells, 19R, 25R, 10R and
6R, had a total of 12 stages pumped (including 2 re-fracs) using
Schlumberger for the pumping operation. All chemicals were
sourced by PPC. Operationally the project went smoothly with all
stages pumped in 29 days and all 5 stages pumped on 19R were
pumped in 6 days. This was a significant improvement on the last
fracturing operation conducted by the company when 10 stages
took a total of 62 days to pump. A post job review was carried out in
the second half of 2017 which determined that the key failing was
attributed to petrophysically derived properties not accurately
representing the mobile water saturation in tight rock. This led
to unexpected formation water production from the target zones.
Based on the results of the Phase 1 fracturing campaign the
contingent resources in both the Tournaisian and the northern
part of the Devonian reservoirs have been removed from the total
amount of contingent resources in the Rudenkivske license.
Production facilities
Operations at the main processing facility, the LPG plant and the
oil loading facility continued smoothly throughout the year. A
routine annual plant shutdown of 2 days for maintenance was
successfully completed in September. Manifold pressure was
reduced to 50 psig in October from 90 psig having a positive effect
on 9 of the gas producing wells and also increasing oil production.
Elyzavetivske Production Licence
Production
Average production from the Elyzavetivske field in 2017 was
1,172 boepd (2016: 1,448 boepd) comprising 6.9 MMcfd of gas
(2016: 8.6 MMcfd) and 18 bpd of condensate (2016: 23 bpd), an
overall 19% decrease in production on the average for 2016. The
decrease is as a result of the pressure decline in the field.
Development and drilling
There was no drilling activity on the Elyzavetivske field during
the year. The following enhancements were carried out during
2017:
• EM53 was brought online in April with a rate of 1.3 MMscf/d on
a 48/64ths” choke however the rate declined through the year
due to liquid loading.
• 6R had 17m of perforations added in April producing a total of
• EM205 was brought on line in June 2017 but was only able to
58.5 MMscf of gas at the beginning of May.
produce 0.1 MMscf/d due to liquid loading.
• R25 was abandoned in September due to no significant
quantities of gas production being achieved, from this well,
following the fracturing campaign.
• NN22 was worked over in June and produced an initial rate
of 8 MMscf/d before production became hampered by water
Production facilities
The Elyzavetivske production facility continues to operate
efficiently. The manifold pressure was dropped from 100 to 75
psig in November which helped stabilise the gas rate decline in the
final quarter of 2017.
JKX Oil & Gas plc Annual Report 2017 18
STRATEGIC REPORT
Regional operations update
Russia
Hungary
Koshekhablskoye licence
Production
Average production from the Koshekhablskoye field in 2017
was 5,019 boepd (2016: 6082 boepd) comprising 29.8 MMcfd of
gas (2016: 36.1 MMcfd) and 55 bpd (2016: 65 bpd) of condensate,
a 17% decrease on the average for 2016. This decrease in
production is due to the delays in working over Well 25 caused by
a fire. In total Well 25 was offline for 4 months in 2017.
Development and drilling
Well 25 was shut-in during the first week of March for the rig
up with the workover commencing in the first week of April.
The workover was on schedule when a fire broke out around
the drillers control cabin on the 12th April. At which point
operations were suspended until 18th June once repairs had
been completed. CRA (chrome) tubing was then run in hole and
the well re-started production on the 6th July following an acid
job.
Well 5 workover commenced on the 21st August. The ratch-latch
was unable to be released due to difficulties in transmitting
sufficient torque downhole. The tubing was then cut and
retrieved in 3 separate parts taking a month more than planned.
The casing repair and running of the completion was successful.
Communication with the reservoir was not possible despite
repeated efforts with coiled tubing during December.
Production from crestal well-20 has declined from 13.9 MMcfd
to 11.7 MMcfd through the year without any additional acid
stimulation. Production from this well has continued to exceed
expectations despite the presence of a fish.
Since the workover to install chrome tubing in Well 25,
production from this well has been more stable than prior to
the workover. Production after the workover peaked at 10.5
MMscf/d on the 5th October prior to declining to 9.5 MMscf/d at
the year end.
Well-27 has been producing gas at rates between 8.8–12.0 MMcfd
on a monthly average basis, having required five acid treatments
through the year (8 in 2016). The deep east-flank well-15
continues to produce approximately 0.6 MMcfd on a monthly
average basis.
Production facilities
There were no changes to the facilities in 2017.
Following applications made in 2015, JKX operates six Mining
Plots (production licences) in Hungary which cover a total of 200
sq km. Theses licences are 100% owned by Riverside Energy
Kft, the Company’s wholly-owned Hungarian subsidiary, with
the exception of the Emod V licence where Riverside has a 100%
Paying Interest and a 97% Working Interest through the end of
2018.
Hajdunanas IV
Hajdunanas V
Tiszavasvari IV
Emod V
Pely I
Jaszkiser II
28 sq km
7 sq km
41 sq km
100 sq km
18 sq km
6 sq km
The licence terms enable JKX to carry out appraisal and
development activity over a 30 year period.
Hajdunanas field
Production from the Hajdunanas and Gorbehaza Fields in north
east Hungary, which form the Hajdunanas IV Mining Plot, was
suspended by the previous operator in 2013.
In December 2016 a sidetrack to the Hn-2 well (Hn-2ST) was
completed. It had been planned to access remaining “attic”
Pannonian reservoir gas and to test the oil potential of the
underlying Miocene volcanoclastic sequence, previously
productive in the Hn-1 well. An additional Pannonian gas
bearing interval was identified, brought onto production in
February 2017. This was the first drilling operation completed
since JKX assumed operatorship in November 2014.
The Hn-2ST well tested 1.5 MMcfd from the Pannonian Pegasus
sands and 2.8 MMcfd from a lower Pannonian sand interval. The
latter was a newly discovered productive horizon in the field.
The underlying Miocene interval was found to be dry.
Gas sales commenced in February 2017 at an initial rate of 1.8
MMcfd, after a production and sales break of more than three
years. Production continued through September 2017 when
the Hn-2ST well was shut in, as a result of high water and sand
production. In October the Hn-1 well was worked over and the
Hn-1 Lower Pannonian reservoir was brought back on stream at
a sales rate of 0.7 MMcfd.
As a result of strategic refocusing of JKX on its core areas,
the Group is now pursuing a full divestment of its remaining
Hungarian licence interests.
JKX Oil & Gas plc Annual Report 2017
19
Slovakia
Exploration
JKX holds a 25% equity interest in the Svidnik, Medzilaborce,
Snina and Pakostov exploration licences in the Carpathian fold
belt in north east Slovakia. A programme of magneto-telluric
geophysical surveys combined with seismic re-interpretation
has led to the identification of a number of shallow but sizeable
prospects, both oil and gas targets, across the licences.
The combination of revised permitting procedures and local
activist environmental opposition has delayed well location
permitting, access and construction throughout 2017. Numerous
initiatives have been followed in an effort to resolve the wellsite
access and protestor issues. As a result of strategic refocusing
of JKX on its core areas, the Group is now pursuing a withdrawal
from Slovakia.
JKX Oil & Gas plc Annual Report 2017 20
STRATEGIC REPORT
Reserves and resources
Reserves Update
Following an internal re-evaluation, we have reduced our 2P reserves from 109.4 to 95.1 million boe or 13% year-on-year. The most
significant reduction is due to the negative results from the pilot fracturing program carried out at the Rudenkivske field in June
2017 in Ukraine.
An extensive review following the fracturing of 12 intervals in 4 Soviet era wells has led the Company to temper its assumptions
about recovery rates per well throughout the field. A new field development plan has been generated based on this analysis (see
below). As a result, we have reduced our Rudenkivske 2P reserves all of which were attributed to the Devonian clastic horizons
located in the southern section of the field. Although some reserves were added to reflect historical production (and remaining
potential) in the Visean horizons to the north of the field, total Rudenkivske 2P reserves have been reduced by 7.1 million boe
or by 32%.
At the same time, 2.2 million boe of 2P reserves have been added in the Ignativske field to reflect the potential of Devonian clastics
that extend from southern Rudenkivske into the Ignativske section of the field and which were previously not included in field
development plans.
Once 2017 production of 1.2 million boe has been taken into account, total reduction of our reserves in Ukraine amounts to
5.8 million boe.
In addition, we have reduced our 2P reserves in Russia attributed to the planned Callovian well by 6.8 million boe. Given our current
estimates of US$25-30 million required to drill a well to the target of 5800 meters on the one hand, and low gas prices in Russia on the
other, the well is at present considered not economic. This reduction in reserves will have no impact on current production rates, an
additional 1.8 million boe reduction in reserves is attributed to production in 2017.
Total remaining 2P reserves at 31 December 2017
Total
Oil (MMbbl)
Gas (Bcf)
Oil + Gas (MMboe)
Ukraine
Oil (MMbbl)
Gas (Bcf)
Oil + Gas (MMboe)
Russia
Oil (MMbbl)
Gas (Bcf)
Oil + Gas (MMboe)
*0.26 Bcf produced in Hungary
Field-by-Field 2P reserves at 31 December 2017
MMboe
Ukraine
Ignativske
Movchanivske
Novomykolaivske
Rudenkivske
Zaplavska
sub-total Novo-Nik production licences
Elyzavetivske
Total Ukraine
Russia
Koshekhablskoye
Total
31 Dec 2016
Revisions
Production
31 Dec 2017
3.9
632.6
109.4
3.1
155.6
29.1
0.8
476.9
80.3
0.2
(68.8)
(11.4)
0.3
(29.1)
(4.6)
(0.1)
(40.1)
(6.8)
(0.2)
(17.3)*
(3.0)
(0.2)
(6.1)
(1.2)
(0.0)
(10.9)
(1.8)
3.9
546.5
95.1
3.2
120.4
23.3
0.7
425.9
71.7
Dec 2016
Revisions
Production
Dec 2017
3.9
0.6
0.7
22.2
-
27.4
1.7
29.1
80.3
109.4
2.2
0.2
(0.1)
(7.1)
-
(4.9)
0.3
(4.6)
(6.8)
(11.4)
(0.5)
(0.1)
(0.1)
(0.1)
-
(0.8)
(0.4)
(1.2)
(1.8)
(3.0)
5.6
0.7
0.5
15.0
-
21.8
1.6
23.3
71.7
95.1
JKX Oil & Gas plc Annual Report 2017 21
JKX contingent resources
There is no change to the contingent resources this year in any of the other fields except Rudenkivske. Rudenkivske requires a
reduction in contingent resources to reflect the failure of the Frac campaign in 2017. The frac campaign was specifically targeting
contingent resources in the Tournaisian and Devonian reservoirs in the north of Rudenkivske. The frac campaign in 2017 showed
that these reservoirs are unable to produce sufficient quantities of gas to justify further development of this area.
MMboe
Ukraine
Ignativske
Movchanivske
Novomykolaivske
Rudenkivske
Zaplavska
sub-total Novo-Nik production licences
Elyzavetivske
Total Ukraine
Russia
Koshekhablskoye
Hungary
Hajdunanas
Tiszavasvari 6
Total
Ukraine field development plans update
1C (low)
2C (best)
3C (high)
11.98
0.00
0.00
9.16
0.03
21.17
0.00
21.17
24.12
0.00
0.20
45.49
17.53
1.25
0.00
65.52
0.38
84.68
6.20
90.88
74.77
0.00
0.30
165.95
50.10
2.76
0.15
197.89
1.41
252.31
20.83
273.14
107.53
0.00
0.70
381.37
Since the arrival of the new senior management team and new Board, we have significantly revised our field development plans
in Ukraine.
Our plan for 2018 includes significant activity to boost production in our core fields and engage in low risk appraisal. This
includes 12 workovers, 4 sidetracks and one new well. We plan to take advantage of access we have gained to 5 state-owned wells
located on our licenses to target low-cost production enhancement opportunities. Our main development targets are production
enhancement through evaluation of clastic reservoirs in the western part of the Ignativske field, infill drilling at the Elyzavetivske
field, appraisal of the West Mashivske area of Elyzavetivske, testing the deep Devonian horizons at our Movchanivske field and a
sidetrack to target the same fault block as IG132.
Our approach to the development of the Rudenkivske field has changed significantly. The new field development plan now targets
the Devonian horizons in the southern section of the field. This is where the Company was able to achieve the best results to date
(wells R12 and R103) and where target depths are relatively shallow. Meanwhile, the number of planned wells targeting Visean
sands in the northern part of the field – the main target of the previous field development plans - has been significantly reduced.
Overall, compared to the previous Rudenkivske field development plan, the number of target wells and fracture stages have been
significantly reduced. To achieve lower costs per reservoir penetration, the use of multilateral wells is envisaged. We expect to be
able to finance the program from cashflow when drilling begins in 2019.
JKX Oil & Gas plc Annual Report 2017 22
STRATEGIC REPORT
Performance in 2017
PRODUCTION SUMMARY
Production
Oil (Mbbl)
Gas (Bcf)
Oil equivalent (Mboe)
Daily production
Oil (bopd)
Gas (MMcfd)
Oil equivalent (boepd)
OPERATING RESULTS
Revenue
Oil
Gas
Liquefied petroleum gas
Other
Cost of sales
Exceptional item – production based taxes
Exceptional item - reversal of provision for impairment of
Ukrainian oil and gas assets
Exceptional item – impairments and well write offs
Exceptional item – write off of appraisal expenditure in Ukraine
Other production based taxes
Depreciation, depletion and amortisation - oil and gas assets
Other operating costs
Total cost of sales
Gross profit before exceptional items
Gross profit/(loss) after exceptional item
Disposal of property, plant and equipment
Exceptional items
Administrative expenses
Gain/(loss) on foreign exchange
Gain/(Loss) from operations before exceptional items
Loss from operations after exceptional items
Total
2017
Second half
2017
First half
2017
Total
2016
286
17.2
3,160
784
47
8,658
145
8.7
1,604
788
48
8,717
141
8.5
1,556
779
47
354
20.0
3,691
967
55
8,598
10,083
Total
2017
$m
Second half
2017
$m
First half
2017
$m
Total
2016
$m
15.8
54.3
3.8
-
73.8
7.1
28.7
2.2
-
38.0
(1.8)
(24.3)
-
-
-
(9.0)
(10.1)
(12.6)
(33.5)
6.3
4.5
(0.6)
(1.3)
(6.6)
(1.3)
(2.2)
(5.3)
-
(2.0)
-
(17.7)
(18.8)
(19.5)
(82.4)
17.8
(8.5)
-
(4.5)
(22.2)
0.4
(4.0)
(34.8)
17.3
54.4
4.6
0.1
76.4
(4.4)
5.6
(11.5)
(9.4)
(16.9)
(16.8)
(19.9)
(73.2)
22.8
3.3
(0.5)
(1.5)
(15.9)
1.4
7.8
(13.2)
10.2
25.7
2.4
0.1
38.4
(2.6)
5.6
(11.5)
(9.4)
(7.9)
(6.7)
(7.3)
(39.7)
16.5
(1.2)
0.1
(0.2)
(9.3)
2.7
10.0
(7.9)
JKX Oil & Gas plc Annual Report 2017
23
EARNINGS
Net loss ($m)
Net (loss)/profit before exceptional items ($m)
Basic weighted average number of shares in issue (m)
(Loss)/profit per share before exceptional item (basic, cents)
Loss per share after exceptional item (basic, cents)
Pre-exceptional earnings before interest, tax, depreciation
and amortisation ($m)1
Total
2017
(17.7)
(0.7)
172
(0.41)
(10.26)
Second half
2017
First half
2017
(10.0)
4.3
172
2.48
(7.7)
(5.0)
172
(2.89)
(5.8)
(4.46)
25.3
17.0
8.3
SALES PRICES
Oil (per bbl)
Gas (per Mcf)
LPG (per tonne)
COSTS OF PRODUCTION ($/boe)
Production costs (excluding exceptional item)
Depreciation, depletion and amortisation
Production based taxes
CASH FLOW
Cash generated from operations ($m)
Operating cash flow per share (cents)
STATEMENT OF FINANCIAL POSITION
Total cash2 ($m)
Borrowings (excluding derivatives) ($m)
Net debt3 ($m)
Net (debt)/cash to equity (%)
Return on average capital employed4 (%)
Increase in property, plant and equipment/
intangible assets ($m)
Ukraine
Russia
Other
Total
Total
2017
Second half
2017
$72.21
$3.32
$510
Second half
2017
$4.53
$4.17
$4.99
First half
2017
$57.45
$3.67
$419
First half
2017
$7.84
$6.46
$5.76
Second half
2017
First half
2017
11.7
6.8
4.0
2.3
Second half
2017
First half
2017
3.2
0.3
2.9
1.6
(2.4)
4.4
4.1
0.4
8.9
4.2
16.3
(12.1)
(7.9)
(9.3)
8.3
1.7
0.4
10.4
$64.26
$3.50
$467
Total
2017
$6.27
$5.30
$6.74
Total
2017
15.7
9.1
Total
2017
7.4
16.6
(9.2)
(6.3)
(11.7)
12.7
5.8
0.8
19.3
Total
2016
(37.1)
(7.5)
172
(4.34)
(21.56)
15.8
Total
2016
$45.94
$2.95
$375
Total
2016
$5.38
$5.05
$4.89
Total
2016
17.0
9.9
Total
2016
14.3
16.8
(2.5)
(1.6)
(22.4)
4.0
0.3
1.3
5.6
1. Earnings before interest, tax, depreciation and amortisation (‘EBITDA’) is a non-IFRS measure and calculated using Loss from operations of $13.2m (2016: $34.8m) and adding
back depletion, depreciation, amortisation and exceptional items of $38.5m (2016: $50.6m). EBITDA is an indicator of the Group’s ability to generate operating cash flow that can
fund its working capital needs, service debt obligations and fund capital expenditures.
2. Total cash is Cash and cash equivalents plus Restricted cash.
3. Net debt is Total cash less Borrowings (excluding derivatives).
4. Return on average capital employed is the annualised loss for the period divided by average capital employed.
JKX Oil & Gas plc Annual Report 2017 24
STRATEGIC REPORT
Financial review
Ben Fraser
Chief Financial Officer
"Both the Ukrainian and the Russian assets
have positive cash flow and the Group’s
liquidity is forecast to improve through 2018
and 2019.”
Group revenues
3.5%
Ukraine
Gas
Oil
Liquefied Petroleum
Gas (‘LPG’)
Other
Russia
Gas
Condensate
Hungary
Gas
Condensate
Total
Sales prices
2017
($m)
2016
($m)
Change
($m)
%
Change
57.0
35.8
16.5
4.6
0.1
17.6
17.0
0.6
1.8
1.6
0.2
54.8
35.9
15.1
3.8
-
19.0
18.3
0.7
-
-
-
76.4
73.8
2.2
(0.1)
1.4
0.8
0.1
(1.4)
(1.3)
(0.1)
1.8
1.6
0.2
2.6
4.0
(0.3)
9.3
21.0
(7.4)
(7.1)
(14.3)
100.0
100
100
3.5
%
Change
13.5
39.9
24.7
2017
2016
Change
Ukraine
Gas ($/Mcf)
Oil ($/bbl)
6.72
64.26
5.92
45.94
LPG ($/tonne)
467.49
374.81
0.80
18.32
92.68
Russia
Gas ($/Mcf)
Hungary
Gas ($/Mcf)
Group
Gas ($/Mcf)
Oil ($/bbl)
1.69
1.49
0.2
13.4
6.06
-
6.06
N/A
3.50
64.26
2.95
45.94
0.55
18.32
92.68
18.6
39.9
24.7
LPG ($/tonne)
467.49
374.81
Average exchange rates
2017
2016
Change
Russia (RUB/$)
Ukraine (UAH/$)
58.30
26.60
64.31
25.55
6.01
(1.05)
%
Change
9.3
(4.1)
JKX Oil & Gas plc Annual Report 2017 25
Results for the year
The Group has reported a loss of $17.7m for 2017 compared to a
loss of $37.1m for 2016. Both of these losses include significant
exceptional charges: $17.0m in 2017 and $29.7m in 2016 (net of
deferred tax effects of $4.1m in 2017 and $1.2m in 2016).
2017), mainly because of delays in the workover of Well 25. This
decrease was offset by a 13.4% increase of the average sales
price in dollar terms from $1.49/Mcf in 2016 to $1.69/Mcf in 2017
due to both the appreciation of the rouble and a 3.9% rise in the
average rouble gas sales price from 2016 to 2017.
Further details on the exceptional items in 2017, which include
the unsuccessful Rudenkivske fracturing program, movement
in the provision for production based taxes for 2010 and 2015,
severance payments and non-cash impairment movements, are
included in this review below.
The Group has reported a loss before exceptional items of
$0.7m for 2017 which compares favourably to the loss before
exceptional items of $7.5m for 2016.
Hungary revenues
Hungarian gas and condensate sales, which recommenced in
February 2017 and made up 2% of the Group’s volumes sold in
2017, are expected to continue throughout 2018.
Cost of sales
Exceptional items
Exceptional charges of $19.7m in 2017 are made up of the
following:
Revenue
Although total Group production decreased 14.4% from 3,691
Mboe in 2016 to 3,160 Mboe in 2017, annual revenue increased
3.5% to $76.4m (2016: $73.8m) thanks to higher commodity prices
in both Ukraine and Russia. It continues to be the case that our
gas sales prices and netbacks are significantly higher in Ukraine
than in Russia.
Ukraine revenues
The $2.2m increase in total revenues was due to the sales price
increases shown in the table, the effects of which were offset by
the decrease in total sales volumes from 1,336 Mboe in 2016 to
1,144 Mboe in 2017.
In dollar terms the average gas sales price increased by 13.5%
from $5.92/Mcf in 2016 to $6.72/Mcf in 2017. This reflects both
the 18.1% increase in average sales price in hryvnia terms from
5,379 UAH/Mcm in 2016 to 6,352 UAH/Mcm in 2017 and the
hryvnia being weaker in 2017 than 2016. Since 2015 gas prices in
Ukraine have been more closely following global market trends,
and the increase in price of gas imported from Europe is a reason
for the higher average gas sales price in 2017.
Total annual gas sales volumes decreased 12.2% from 171,828
Mcm in 2016 to 150,909 Mcm in 2017, primarily due to the
annual gas production volume having decreased 10.3% from
192,732 Mcm in 2016 to 172,939 Mcm in 2017 (from 3,109 boepd
in 2016 to 2,789 boepd in 2017). The two main factors for the
lower production were the natural decline of the Elyzavetivske
field and Novomykolaivske complex and the lower than
usual enhancement activity in the first half of 2017 while the
Rudenkivske field fracturing programme was being planned
and carried out. For more detail please refer to the Regional
operations update (pages 16-17).
The increase in average oil sales price from $45.94/bbl in 2016
to $64.26/bbl in 2017 reflects both the increase in Brent from an
average of $43.55/bbl during the 2016 to $54.55/bbl during the
2017 and also our sales price’s considerable average premium to
Brent of $9.8/bbl during 2017. Domestic demand has remained
robust through 2017 and greater than domestic supply.
The average LPG sales price increased to $467.49/tonne in
2017 (2016: $374.81/tonne) due to tight controls over customs
clearance limiting LPG product imports. Higher sales price
compensated the fall in sales volumes from 10,075 tonnes in 2016
to 9,855 tonnes in 2017.
Russia revenues
The $1.4m decrease in total revenues from $19.0m in 2016 to
$17.6m in 2017 is due to lower gas production. Total annual
gas production decreased by 17.7% from 374,176 Mcm in 2016
to 307,841 in 2017 (from 6,035 boepd in 2016 to 4,965 boepd in
• $9.4m costs incurred at Rudenkivske where there was an
unsuccessful fracturing programme in the first half of 2017.
Two of the wells included in the programme were abandoned
due to lack of gas production and the other two wells are not
expected to produce enough to pay back their costs.
• $5.9m movement in impairment provisions. As a result of the
year end impairment review, impairment charges of $7.9m
and $3.6m were made in respect of assets in Slovakia and
Hungary and a reversal of $5.6m was made in respect of the
Elyzavetivske field (see Note 5 to the financial statements).
• $4.4m of movement in provision for production-based taxes
in respect of 2010 and 2015 (see Note 18 to the financial
statements).
Cost of sales before exceptional items
2017 cost of sales before exceptional items totalled $53.6m (2016:
$56m). This includes:
• $19.9m of operating costs, which is similar to the $19.7m
recorded in 2016.
• $16.9m of production taxes, which is $0.8m lower than in
2016, mainly because of lower production volumes and the
introduction of a lower royalty rate for oil in Ukraine. Only
$1.8m of the total production taxes relate to Russia where the
mineral extraction tax rate for wells deeper than 5,000m has
remained at 312roubles/Mcm.
• $16.8m of depreciation, depletion and amortisation (‘DD&A’)
charge for 2017, which is $1.9m lower than in 2016 because of
the lower production volumes in Ukraine and Russia in 2017.
Analysis showing production costs, production taxes and
netbacks for both our Ukrainian and Russian operations is shown
on pages 7 and 8.
Administrative expenses
Exceptional items
Exceptional charges of $1.5m in 2017 consist of severance and
legal costs relating to the departure of the previous CEO and CFO.
Other administrative expenses before exceptional items
Other administrative expenses before exceptional items have
decreased by $6.7m to $15.9m in 2017 (2016: $22.2m) as a result of
the following:
• A $4.7m decrease in legal and professional fees consisting
of a $4.2m reduction in legal fees due to the completion
of arbitration case and the cutting of a further $0.5m of
advisory costs.
• A $2.5m decrease in staff and other administrative costs
across the Group mainly as a result of cost savings initiatives.
JKX Oil & Gas plc Annual Report 2017 26
STRATEGIC REPORT
Financial review
The effect of these decreases was offset by a $0.5m increase in
marketing and lobbying costs to raise awareness of the previous
strategy. Contracts with agencies engaged in this were cancelled
in the second half of 2017.
Net cash outflow from financing activities in the period mainly
relates to the $1.9m of accretion payment to the bondholders in
February 2017 (2016: $10.9m redemption of the Bond in February
2016 and $9.0m used to repurchase 50 convertible bonds).
Net finance charges
Finance costs, mainly comprising convertible bond interest,
decreased from $4.6m in 2016 to $3.2m in 2017 due to the
reduction in principal outstanding that occurred in 2016.
$10.0m of the bonds were redeemed in February 2016 and
subsequently bonds with face values of $2.2m, $1.4m and $6.4m
were repurchased and subsequently cancelled in June, September
and October 2016, respectively. In January 2017 the remaining
$16.0m bonds outstanding were restructured as noted below.
Finance income of $0.3m comprises income from bank deposits
of $0.3m (2016: $0.8m). 2016 income also included a $1.0m gain on
the repurchase of convertible bonds noted above.
Taxation
The total tax charge for the year was $1.6m (2016: $1.0m)
comprising a current tax charge of $3.0m (2016: $1.3m) and a
deferred tax credit of $1.3m (2016: credit $2.4m) (see Note 27
to the financial statements). The higher 2017 $3.0m current
tax charge relates to Ukraine due to the higher annual profit
recorded.
Cash flows
Unrestricted cash held at the end of 2017 was $6.9m, or less than
a half of the amount held at the start of the year. The main reason
for this is the significant cash spent on capex during the year, as
shown in the chart below.
Cash generated from operations was $15.7m (2016: $17.0m).
Interest paid during the period comprised $1.8m bond interest
(2016: $2.4m). Income tax paid in the period increased to $2.9m
(2016: $0.01m), due to higher profits earned by our Ukrainian
subsidiary.
Of the $16.7m total cash spent on investment projects during
the year (2016: $7.5m), $9.4m relates to costs incurred at
Rudenkivske already referred to as an exceptional item. Of the
remaining $7.1m cash spent on capex in 2017, $1.1m relates to
other enhancement projects in Ukraine, $1.5m relates to Hungary
and $4.2m relates to Russia where there were workovers of
Wells 25 and 5. At the year-end creditor balances totalling $1.6m
of further capex incurred in respect of the Well 5 workover
remained unpaid.
Cash flows ($m)
No dividends were paid to shareholders in the period (2016: nil).
The resultant decrease in cash and cash equivalents in the period
before adjusting for foreign exchange effects was $7.1m (2016:
$11.3m).
Liquidity
At start of 2017 the Company completed the restructuring of
the remaining $16 million of Bonds. The financing of the Bonds
is within the operating cash flow capabilities of the Company.
The payment of $6.9 million due in February 2018 was made on
time. The remaining payments are as follows: $0.8m in August
2018, $6.0m in February 2019, $0.4m in August 2019 and $5.8m in
February 2020.
In December 2017 our operating subsidiary in Ukraine secured
a 12 month revolving credit line from Tascombank for UAH150
million, equivalent to $5.3m as at 31 December 2017, which
remains undrawn.
Going concern
While there are sensitivities related to issues such as sales prices,
and technical and geological risks, and material uncertainties
regarding production-related tax disputes with the Ukrainian
Government, the Group has the resources and ability to address
these. Both the Ukrainian and the Russian assets have positive
cash flow and the Group’s liquidity is forecast to improve through
2018 and 2019. As noted above, at current market prices and
planned production levels, operating cash flow is sufficient to
cover the bond repayment schedule. As a result the consolidated
financial statements have been prepared on a going concern
basis (see note 2 to the financial statements).
Ben Fraser
Chief Financial Officer
35.0
30.0
25.0
20.0
15.0
10.0
5.0
0.0
15.7
(1.8)
(2.9)
14.1
(9.4)
(7.1)
(1.9)
0.2
6.9
31
December
2016
Operating
cash flows
Interest
paid
Income tax
paid
CAPEX spent
(Rudenkivske
programme)
CAPEX
spent (other
projects)
Bond
repayment
Interest
received and
other cash
movements
31
December
2017
JKX Oil & Gas plc Annual Report 2017 27
STRATEGIC REPORT
Corporate social responsibility (‘CSR’) review
Our understanding
JKX Oil & Gas plc (JKX) are committed
to understanding, monitoring and
managing our social, environmental
and economic impact to enable us to
contribute to society’s wider goal of
sustainable development.
Achievements in 2017
• All Injury Frequency Rate (AIFR) of Zero
• Environmental Incident Frequency Rate (‘EIFR’) of 0.32
• Maintained our ISO 9001 Quality Management
accreditation
• Maintained our ISO 14001 Environmental accreditation
• Maintained OHSAS 18001 Health and Safety accreditation
• Established and maintained the recording and monitoring
process for our Greenhouse Gas reporting requirements
• Prepared and submitted the Carbon Disclosure Project
report
• Prepared and submitted report to the Global Reporting
Initiative
• Implemented the requirements of ISO 26000
• Prepared and submitted report Global Reporting Initiative
report on Sustainability.
• Completed enhanced Stakeholder Management
procedures
• Planning for the implementation of the Modern Slavery
Act requirements 2017
• Updated and reviewed HSECQ Management Systems
across the group
• Continued with ISO 9001 accreditation process for YGE.
Our vision
At JKX we are committed to target key health and safety issues
and to identify and work with those bodies best placed to assist
in injury/ill health reduction with the aim of achieving zero
harm to employees, environment, contractors, communities &
property.
Our approach
Our approach to governance, Health, Safety, Environment and
Quality (HSECQ), people, supply chain, and Social commitment
directly affect our ability to run our business successfully.
Our impact
The increasing concern of environmental and social impacts
means that to achieve long term success, JKX must continue
looking after people and planet, not just profit.
Our csr process is board led
Our Health, Safety, Environment, Community and Quality
(‘HSECQ’) manager reports directly to the CFO and has
responsibility for creating a framework and maintaining the
HSECQ Management System for the management of the Group’s
non-financial impacts. The Board is provided with monthly
updates relating to the major CSR issues. A management review
of all HSECQ systems is carried out every year.
Local responsibility
We have fully trained HSECQ teams. Our teams report to the
General Director of the local operating company and the Group
HSECQ manager.
CSR policies, procedures and standards
We aim to comply with all local laws and regulations and to
exceed standards where possible. We expect our partners to
reach the same standards.
JKX Oil & Gas plc Annual Report 2017 28
STRATEGIC REPORT
Corporate social responsibility (‘CSR’) review
Health and safety performance
Our approach
By integrating health, safety and
environmental considerations into all
aspects of our business, we protect our
employees, our communities and the
environment.
We will never knowingly compromise
our health, safety, environmental
or quality standards to meet our
operational objectives.
Health and safety policy
We believe this policy represents a clear statement of core
principles and a sensible approach to health and safety
management within the JKX Group of Companies.
Our priority is to ensure that all staff and contractors work
in a safe environment, where effective systems of work are
maintained and appropriate procedures and processes are
followed.
Health and safety statistics
We set annual HSECQ targets for all levels within the
organisation. During 2017 we achieving an AIFR of 0 per
200,000 hours worked.
With a combined labour force of 615 personnel in 2017 we
reported 58 incidents, which demonstrates consolidation in our
incident reporting procedures.
After the end of the reporting period in February 2018 during
a well maintenance operation an accident happened, which
resulted in the fatality of a PPC employee. A committee was
established to conduct full investigation of the accident which
is expected to conclude in Q2 2018.
Health and safety statistics
All Injury Frequency Rate (‘AIFR’) 2017
5.00
4.00
3.00
2.00
1.00
2001
2003
2005
2007
2009
2011
2013
2015
2017
0.0
HSECQ Statistical Analysis for 2017
Fatal accident case
Lost time injuries
Medical treatment/Restricted work cases
Near miss/Loss/Hazards Property damage
Unsafe act or conditions
0
0
0
58
JKX Oil & Gas plc Annual Report 2017
29
Health and safety statistics
JKX and Contractors
2017
JKX and contractors
Days away from work
Fatal accident cases
Lost time injury cases
Medical treatment/
Restricted work cases
Near miss/Loss/Hazzards
Property damage/
Unsafe act or conditions
Environmental incidents
Man-hours since last lost
time injury
0
0
0
0
58
2
Safety exposure man hours
Fatal accident case frequency rate
Lost time injuries frequency rate
Medical treatment/Restricted work cases
frequency rate
Near miss/Loss/Hazzards
Property damage/
Unsafe act or conditions frequency
Environmental incidents frequency rate
2017
1,247,650
0
0
0
9.29
0.32
4,669,545
Man-hours since last fatal accident case
3,579,011
Our safety statistics for 2017
We have a clear Safety Management System, which provides
a comprehensive and systematic vision of our objectives. In
occupational health, the drug and alcohol policy continues to be
successful throughout the Group with no instances of breaches
noted. The policy applies to all our staff and contractors
and forbids the possession and/or use of defined prohibited
substances which includes drugs and alcohol. Our policy also
clarifies our testing and inspection procedures.
Drilling risks
We recognize that the safety and efficiency of our drilling and
workover operations depends primarily on the performance of
our employees and contractors. We utilise a mix of primarily
local staff with decades of local experience and expatriate
supervisors on our drilling rigs to provide additional expertise
and oversight. This has enabled us to define and manage risk
more clearly using Western methodology.
JKX drilling and workover employees and contractors have
the necessary training in well safety and well control, and all
personnel have the authority (and are expected) to stop any job
they deem unsafe.
We select supervisors for their expertise as well as for their
familiarity with the regions where we operate. They understand
and are sensitive to local working practices and culture, and
work to enhance the education and training of local staff and
contractors alike.
We make the best use of our resources by sharing expertise
between our operating companies, and we have a strong
collaborative environment where everybody contributes to
analyse the risks and develop mitigating strategies in order to
minimise it.
Before we even begin to drill or workover a well, we identify and
address the inherent risks in drilling and workover operations.
This industry best practice makes sure:
• Health, safety and environment issues are clearly identified
and assessed;
• Regulatory and JKX requirements are met;
• Risks have been removed or mitigated according to a
structured, systematic process, with any remaining risks
demonstrated to be both tolerable and as low as reasonably
practicable;
• Critical safety items and procedures are identified to
manage remaining risks;
• A comprehensive environmental management plan has been
developed;
• Social, health, and environmental benefits and opportunities
are identified; and
• Personnel roles and responsibilities are indicated.
We have a Manager based in our London office that is
responsible for the planning, reviewing and authorising of
Group drilling and workover operations which significantly
strengthens our capability to identify and manage drilling risk.
Regular visits to site by JKX management and a daily drilling
update is provided to the Board .
Health and safety risk management
We are proud to announce maintenance of our OHSAS 18001
Health & Safety accreditation which is accompanied by our ISO
14001 Environmental accreditation and our ISO 9001 Quality
Management accreditation.
Consistent hazard assessment processes
In both Russia and Ukraine, we continued to carry out risk
management studies using our proven Hazard and Operability
(‘HAZOP’), Hazard Identification (‘HAZID’) and As Low as
Reasonably Practical (‘ALARP’) methodologies.
Health and safety training
Each location has an H&S training budget which includes legally
required training from the host country H&S regulations.
Additional training is provided according to operational
requirements.
JKX Oil & Gas plc Annual Report 2017
30
STRATEGIC REPORT
Corporate social responsibility (‘CSR’) review
Environmental management system
The JKX Environmental Management
System: a comprehensive,
systematic, planned and documented
management process.
Our impact
We comply with all relevant environmental requirements,
including environmental laws and regulations and industry
guidelines.
The Environmental Report for 2017 on the annual performance of
JKX in conjunction with TruCost has identified reduction measure
targets for the 2018 campaign.
Environmental performance in 2017
In 2017, we again made good progress and we were pleased to
continue the ongoing work with The Carbon Disclosure Project.
JKX Oil and Gas are committed to providing information to
investors about its environmental performance. JKX Oil and Gas
achieved a D rating within the Energy sector.
Environmental incident frequency rate (‘EIFR’)
Our EIFR Target for 2017 was not to exceed 0.6 Environmental
incidents per 200,000 hours worked; we achieved 0.32
Greenhouse gas (‘GHG’) emissions reporting
All emissions sources owned, operated or controlled by the Group
are included in our reporting.
Our approach
Our terminals are self-sufficient and can maintain operations
without the need for grid electricity therefore improving
the security of supply. We used the Greenhouse Gas Protocol
methodology for compiling our GHG data.
Mandatory GHG reporting
JKX is required to comply with UK government legislation on
mandatory GHG reporting. The legislation requires all companies
as a minimum, to report Scope 1 and 2 GHG emissions and an
emission intensity ratio. According to the GHG Protocol Scope 2
Guidance released in January 2015, corporates now are to report
two scope 2 emission totals – location-based and market-based.
Since market-based emission factors are not available to any of
JKX’s Russia and Ukraine locations, residual emission factors are
only adopted for offices in U.K., and average grid emission factors
are adopted for locations in Russia and Ukraine.
Global reporting initiative (‘GRI’)
The GRI Reporting Framework is intended to provide a generally
accepted framework for reporting on an organisation’s economic,
environmental, and social performance.
Supply chain management
At the heart of our sustainable supply chain is a policy of localising
supply by fabricating, manufacturing and sourcing as much as
possible as close to the point of use by using indigenous companies.
Our achievements
During 2017 some advances were made in our Supply Chain
Initiative, and this will continue in 2018 with a more focused
approach to procurement and supply.
Environmental Incident Frequency Rate (‘EIFR’)
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0.32
2007 2008 2009
2010
2011
2012 2013 2014
2015 2016 2017
Mandatory GHG reporting
Data point
Scope 1
Scope 2
(Location based )
Scope 2
(Market based )
Units
tonnes CO2e
tonnes CO2e
tonnes CO2e
Scope 1 & 2 Intensity
(Location based )
tonnes CO2e /Mboe
of production
Quantity
2017
331,554
697
706
99
JKX Oil & Gas plc Annual Report 2017 31
STRATEGIC REPORT
Corporate social responsibility (‘CSR’) review
Community, stakeholder engagement , quality and
Investor engagement
Community
Our approach
We are committed to engaging with the community to share the
benefits of our success at our operating plants.
Our Community Engagement.
We conduct various activities to forge good relations with local
communities through participation in forums established by
local authorities and residents' associations, and by creating such
forums.
Assistance in our local communities
In practical terms, our community support frequently involves
using the Company’s plant and machinery - as well as manpower -
to provide much-needed assistance.
Diversity and equality
Access to work opportunities is based on merit, equality, fairness
and need, and no one is treated less favourably on the basis of
their sex, racial or ethnic origin, colour, religion, disability,
marital status, sexuality or age. We will not tolerate any form of
discrimination - either direct or indirect. Acts of discrimination,
prejudice, harassment and victimisation which occur within the
workplace or within the communities in which we work is not
tolerated.
Charitable donations and volunteering
Each operation has a limited budget for good causes and we
handle charitable donations at a local level.
Locally, donations from the Group during 2017 amounted to
$923,000 across the group. Subject to management approval,
staff may be given additional time off in order to join in certain
charity-related activities. A detailed list of donations is available
on request.
Our Stakeholder engagement
Our performance
In 2017 we continued to make progress by improving our
stakeholder communications in Ukraine, Hungary, Slovakia
and Russia.
Outlook
Stakeholder surveys were conducted in 2017 to understand if
we were meeting stakeholder and customer expectations. The
results of the surveys were discussed with senior management
and reviewed as part to the JKX Annual Management Review.
Quality
ISO 9001 accreditation
Achieving ISO 9001 accreditation ensures that the quality
management systems that JKX has adopted work to improve the
efficiency of business and are not just a set of procedures.
Outlook
The new versions of ISO 9001 as well as OHSAS 18001 & ISO 14001
are required by the third quarter of 2018. Practical workshops
are planned in 2018 to support the organisation and get
acquainted with the new standards.
Our investor engagement
We seek to enhance shareholder value through responsible and
effective communication with our shareholders.
JKX Oil & Gas plc Annual Report 2017 32
STRATEGIC REPORT
Principal risks and how we manage them
Our framework of internal controls is
supported by a culture that promotes
good risk management processes led
by the Board.
Responsibilities
The Board is responsible for the Group’s system of internal
control and risk management systems and for reviewing their
effectiveness. As most of the Board members were appointed at
the end of 2017, the Board and Executive team are in the process
of assessing and, if needed, strengthening the systems and
processes.
Risk management process
The risk management process is designed to manage, rather than
eliminate, the risk of failure to achieve business objectives, and
can only provide reasonable, not absolute, assurance against
material misstatement or loss.
Our risk management process involves the Group Risk
Committee and subsidiary Risk Committees in Ukraine
and Russia. Subsidiary Risk Committees have been in place
throughout 2017 and up to the date of approval of this Annual
Report. A Group Risk Committee was in place in the first half
of 2017. However, due to the Board and management changes in
2017, there were no Group risk committee meetings in the second
half of 2017 and beginning of 2018. A Group risk committee is
now being re-established.
Risk Committee
The purpose of the Group Risk Committee is to assist the Board
in the operation and implementation of the risk management
process, and to provide a source of assurance to the Audit
Committee that the process is operating effectively. This
approach aims to actively manage risk in a transparent and
accountable way.
The Risk Committee reports to the Board. The composition of
the Group Risk Committee includes representatives from our
Ukrainian and Russian Risk Committees to expand on the risks
identified locally and their related mitigation plans.
affected as each risk increases, how each risk is being managed or
mitigated and whether the overall business risk has increased or
decreased since the last Annual Report.
The principal risks set out on the following page are not set out in
any order of priority, are likely to change and do not comprise all the
risks and uncertainties that the Group faces.
Risk Profile
The chart below represents our current assessment of the potential impact
and probability of occurrence of each of the principal risks noted below.
Higher
t
c
a
p
m
i
l
a
i
t
n
e
t
o
P
F
A
A,B,E
G H
C,D
G
E
D
Risk management framework
The key elements of the risk management process are as follows:
Lower
Probability of occurrence and risk velocity
Higher
Risk identification - risks faced by the Group are identified by
senior management and risk owners, who periodically review the
risks to ensure that the risk management processes and controls
in their area are appropriate and effective, and that new risks are
identified.
2018
2017
Risk assessment - the consequence and likelihood of each risk
materialising is assessed. Risk registers are used to document
the risks identified, the level of severity of its impact, and
probability of occurrence, ownership and mitigation measures
for each risk.
Risks are then logged with reference to consequence rating,
multiplied by the likelihood rating as follows:
The Board has completed a robust assessment of the most
significant risks and uncertainties which could impact the
business model, long-term performance, solvency or liquidity,
and the results are summarised on this and the following page.
Also presented is an assessment of the probability of each
risk occurring, its potential impact should it occur, the Key
Performance Indicators (‘KPIs’) and strategic priorities most
JKX Oil & Gas plc Annual Report 2017
33
Risk Summary
Risk Profile
What is the risk
KPIs affected
Change from 2016
Liquidity, funding,
and portfolio
management
Geopolitical and
fiscal risks
Reservoir and
operational
performance
- Cash from operations
- Liquidity
- Production
- Liquidity
- Production
I
- Cash from operations
I
- EBITDA per boe
Financial discipline
and governance
- Liquidity
- Cash from operations
Health, safety,
and environment
Asset integrity
- AIPR
- LTI
- EIFR
- Production
- Liquidity
I
Major breach of business,
ethical, or compliance
standards
- Cash from operations
- Liquidity
A
A
B
B
C
C
D
D
E
E
F
F
G
G
H
H
Strategic Objective
impacted
Responsibility
1, 2
CFO
Page
34
1, 2
1, 2
1
3
3
3
The Board
34
Acting CEO
36
Acting CEO
36
Acting CEO
36
Acting CEO
The Board
38
38
38
Commodity prices
and FX fluctuations
- Liquidity
1, 2
CFO
- EBITDA per boe
I
Risk Assessment table
Impact
Probability+ velocity
Insignificant
Minor
Moderate
Major
Catastrophic
Highly
likely
Likely
Very
high
High
Very high
High
Possible
Medium
Medium
Unlikely
Rare
y
t
i
l
i
b
a
b
o
r
P
Low
Very
low
y
t
i
c
o
l
e
V
Low
Very low
Low risk
Medium risk
High risk
LOW
LOW
LOW
LOW
LOW
MED
MED
MED
LOW
LOW
HIGH
HIGH
HIGH
MED
HIGH
HIGH
MED
MED
HIGH
MED
MED
MED
LOW
LOW
LOW
JKX Oil & Gas plc Annual Report 2017 34
STRATEGIC REPORT
Principal risks and how we manage them
What is the risk
Liquidity, funding, and portfolio management
Description: As for any other exploration and production company, our fields are prone to natural
production decline and hence replacing our reserves is important for long-term success. Our ability to
ensure long-term sustainable production depends on having sufficient funds to invest in our development
and efficient allocation of capital on investment projects or acquisitions.
It is important to maintain sufficient liquidity to allow for operational, technical, commercial, legal, and
other contingencies.
Having sufficient funds to invest in development projects or other growth opportunities is subject to not
only cash flow generated by existing operations, but also access to external capital (such as equity or debt
financing) or ability to carry out corporate transactions (such as mergers, acquisitions, or divestitures).
Impact: Inability to build or maintain sufficient liquidity may result in increased risk of having
insufficient funds on hand to address unanticipated cash outflows, need to suspend planned payments to
third parties, or other unplanned actions to urgently build sufficient liquidity.
Poor capital allocation decisions, inability to access external sources of capital or execute corporate
transactions may result in long-term decline in production and cash flow from existing operations and
further reduced ability to engage in new development projects.
With unrestricted cash on hand at 31 December 2017 of $6.9 million compared to $14.1 million at 31
December 2016, this risk has increased compared to the previous year.
Geopolitical and fiscal risks
Probability +
velocity
Impact
Change from
2016
Responsibility
How do we manage it?
Further information
HIGH
HIGH
Officer
minimizing costs.
Chief Financial
The Board plans to accumulate sufficient liquidity by deferring high-risk investment projects and
Chairman’s statement
Upon internal review of reserves and development plans our plan for 2018 includes activity to boost
production in our core fields and to engage in low risk appraisal. Additionally, the new plan envisages
more modest but more realistic development strategy for the Rudenkivske field starting in 2019.
PPC, has secured a standing credit line of approximately $5.3 million and YGE is considering options for a
similar facility.
Projects are analysed and ranked across the Group and capital is allocated accordingly. Additionally, the
Company has established a new Investment Committee which provides an additional venue for discussing
and making investment decisions.
Details are provided in Note 2 to the financial statements and in the long- term viability statement.
page 4
Financial review
page 24
Description: Most of the Group’s operations and more than 97% of our oil and gas assets are located in
Ukraine and Russia and the oil, gas and condensate that we produce is sold into their domestic markets.
There are geopolitical risks related to these countries and relationship between them.
HIGH
HIGH
I
The Board
In respect of the 2010 Claims and 2015 Claims, provisions of $11.3 million and $25.8 million, respectively,
Chairman’s statement
have been recognised in these financial statements to reflect the Company’s estimate of the potential
page 4
liability (see Note 27 to the financial statements).
taxes
capital controls
laws and regulations
Some of such risks may be related to changes in:
•
•
•
•
•
Both countries have relatively weak judicial systems that are susceptible to outside influence, and it can
take an extended period for the courts to reach final judgment.
political situation, or
investor sentiment
Both countries display emerging market characteristics where the right to production can be challenged
by State and non-State parties. The business environment is such that a challenge may arise at any time
in relation to the Group’s operations, licence history, compliance with licence commitments and/or local
regulations.
Local legislation constantly evolves as the governments attempt to manage the economies and business
practices regarding taxation, banking operations and foreign currency transactions. The constantly
evolving legislation can create uncertainty for local operations if guidance or interpretation is not clear.
Geopolitical tensions between Ukraine and Russia, political instability and military action in parts
of Ukraine have negatively impacted its economy, financial markets and relations with the Russian
Federation. Any continuing or escalating military action in eastern Ukraine could have a further adverse
effect on the economy.
Impact: If Management’s interpretation of tax legislation does not align with that of the tax authorities,
the tax authorities may challenge transactions which could result in additional taxes, penalties and fines
which could have a material adverse effect on the Group’s financial position and results of operations.
PPC has at times sought clarification of their status regarding a number of production related taxes. PPC
continues to defend itself in court against action initiated by the Ukrainian tax authorities regarding
production related taxes for August to December 2010 (‘2010 Claims’) and for January to December 2015
(‘2015 Claims’). In addition, in February 2017, the Company was awarded approximately $11.8 million
in damages plus interest and costs of $0.3 million by an international arbitration tribunal pursuant to a
claim made against Ukraine under the Energy Charter Treaty which the Group is currently legalizing in
Ukraine (see Note 27 to the financial statements).
The Group’s operations and financial position may also be adversely affected by interruption, inspections
and challenges from local authorities, which could lead to remediation work, time-consuming
negotiations and suspension of production licences.
Except for the provision in respect of the 2010 and 2015 Claims, the Group’s financial statements
do not include any other adjustments to reflect the possible future effects on the recoverability, and
classification of assets or the amounts or classifications of liabilities that may result from these tax
Financial review
page 24
uncertainties.
communications locally.
A key priority for the Group is to maintain transparent working relationships with all key stakeholders in
our significant assets in Ukraine and Russia and to improve the methods of regular dialogue and ongoing
Our strategy is to employ skilled local staff working in the countries of operation and to engage
established legal, tax and accounting advisers to assist in compliance.
The Group endeavours to comply with all regulations via Group procedures and controls or, where this is
not immediately feasible for practical or logistical considerations, seeks to enter into dialogue with the
relevant Government bodies.
JKX Oil & Gas plc Annual Report 2017 35
What is the risk
Responsibility
How do we manage it?
Further information
Probability +
Impact
Change from
velocity
2016
HIGH
HIGH
Chief Financial
Officer
The Board plans to accumulate sufficient liquidity by deferring high-risk investment projects and
minimizing costs.
Chairman’s statement
page 4
Upon internal review of reserves and development plans our plan for 2018 includes activity to boost
production in our core fields and to engage in low risk appraisal. Additionally, the new plan envisages
more modest but more realistic development strategy for the Rudenkivske field starting in 2019.
Financial review
page 24
PPC, has secured a standing credit line of approximately $5.3 million and YGE is considering options for a
similar facility.
Projects are analysed and ranked across the Group and capital is allocated accordingly. Additionally, the
Company has established a new Investment Committee which provides an additional venue for discussing
and making investment decisions.
Details are provided in Note 2 to the financial statements and in the long- term viability statement.
The Board
In respect of the 2010 Claims and 2015 Claims, provisions of $11.3 million and $25.8 million, respectively,
have been recognised in these financial statements to reflect the Company’s estimate of the potential
liability (see Note 27 to the financial statements).
Chairman’s statement
page 4
Except for the provision in respect of the 2010 and 2015 Claims, the Group’s financial statements
do not include any other adjustments to reflect the possible future effects on the recoverability, and
classification of assets or the amounts or classifications of liabilities that may result from these tax
uncertainties.
Financial review
page 24
A key priority for the Group is to maintain transparent working relationships with all key stakeholders in
our significant assets in Ukraine and Russia and to improve the methods of regular dialogue and ongoing
communications locally.
Our strategy is to employ skilled local staff working in the countries of operation and to engage
established legal, tax and accounting advisers to assist in compliance.
The Group endeavours to comply with all regulations via Group procedures and controls or, where this is
not immediately feasible for practical or logistical considerations, seeks to enter into dialogue with the
relevant Government bodies.
Description: Most of the Group’s operations and more than 97% of our oil and gas assets are located in
Ukraine and Russia and the oil, gas and condensate that we produce is sold into their domestic markets.
There are geopolitical risks related to these countries and relationship between them.
Some of such risks may be related to changes in:
HIGH
HIGH
I
Liquidity, funding, and portfolio management
Description: As for any other exploration and production company, our fields are prone to natural
production decline and hence replacing our reserves is important for long-term success. Our ability to
ensure long-term sustainable production depends on having sufficient funds to invest in our development
and efficient allocation of capital on investment projects or acquisitions.
It is important to maintain sufficient liquidity to allow for operational, technical, commercial, legal, and
other contingencies.
Having sufficient funds to invest in development projects or other growth opportunities is subject to not
only cash flow generated by existing operations, but also access to external capital (such as equity or debt
financing) or ability to carry out corporate transactions (such as mergers, acquisitions, or divestitures).
Impact: Inability to build or maintain sufficient liquidity may result in increased risk of having
insufficient funds on hand to address unanticipated cash outflows, need to suspend planned payments to
third parties, or other unplanned actions to urgently build sufficient liquidity.
Poor capital allocation decisions, inability to access external sources of capital or execute corporate
transactions may result in long-term decline in production and cash flow from existing operations and
further reduced ability to engage in new development projects.
With unrestricted cash on hand at 31 December 2017 of $6.9 million compared to $14.1 million at 31
December 2016, this risk has increased compared to the previous year.
Geopolitical and fiscal risks
•
•
•
•
•
taxes
capital controls
laws and regulations
political situation, or
investor sentiment
Both countries have relatively weak judicial systems that are susceptible to outside influence, and it can
take an extended period for the courts to reach final judgment.
Both countries display emerging market characteristics where the right to production can be challenged
by State and non-State parties. The business environment is such that a challenge may arise at any time
in relation to the Group’s operations, licence history, compliance with licence commitments and/or local
regulations.
Local legislation constantly evolves as the governments attempt to manage the economies and business
practices regarding taxation, banking operations and foreign currency transactions. The constantly
evolving legislation can create uncertainty for local operations if guidance or interpretation is not clear.
Geopolitical tensions between Ukraine and Russia, political instability and military action in parts
of Ukraine have negatively impacted its economy, financial markets and relations with the Russian
Federation. Any continuing or escalating military action in eastern Ukraine could have a further adverse
effect on the economy.
Impact: If Management’s interpretation of tax legislation does not align with that of the tax authorities,
the tax authorities may challenge transactions which could result in additional taxes, penalties and fines
which could have a material adverse effect on the Group’s financial position and results of operations.
PPC has at times sought clarification of their status regarding a number of production related taxes. PPC
continues to defend itself in court against action initiated by the Ukrainian tax authorities regarding
production related taxes for August to December 2010 (‘2010 Claims’) and for January to December 2015
(‘2015 Claims’). In addition, in February 2017, the Company was awarded approximately $11.8 million
in damages plus interest and costs of $0.3 million by an international arbitration tribunal pursuant to a
claim made against Ukraine under the Energy Charter Treaty which the Group is currently legalizing in
Ukraine (see Note 27 to the financial statements).
The Group’s operations and financial position may also be adversely affected by interruption, inspections
and challenges from local authorities, which could lead to remediation work, time-consuming
negotiations and suspension of production licences.
JKX Oil & Gas plc Annual Report 2017 36
STRATEGIC REPORT
Principal risks and how we manage them/cont.
What is the risk
Reservoir and operational performance
Description: Subsurface and operational risks are inherent for our business. The reservoir performance
cannot be predicted with certainty, and operations required for hydrocarbon production are subject to
risks of interruption or failure.
Production from our mature fields at the Novomykolaivske Complex in Ukraine require a high level of
maintenance and intervention to minimize the production decline. In Russia, acidization of deep, high
pressure and high temperature wells and other well maintenance procedures to stabilise production are
required, increasing risk of failure.
Impact: Accurate reservoir performance forecasts from fields in Ukraine and Russia are critical in
achieving the desired economic returns and to determine the availability and allocation of funds for
future investment into the exploration for, or development of, other oil and gas reserves and resources.
If reservoir performance is lower than forecast, sufficient finance may not be available for planned
investment in other development projects which will result in lower production, profits and cash flows.
Inability to ensure continuous operation of wells, flowlines, production facilities and successful execution
of drilling, workover, repair, and enhancement interventions may result in lower production, profits and
cash flows.
In 2017, the Company embarked on a major appraisal program of the Rudenkivske field in Ukraine, with
the results being significantly lower than initially expected. Given the resultant decreased amounts of
liquidity, accuracy of our forecasts is even more important.
Financial discipline and governance
Description: The Group has presence in six countries with major operations in Russia,
Ukraine, and the United Kingdom. Such a complex structure requires rigorous governance
and control procedures to be in place to ensure an appropriate level of financial discipline
and controls, as well as delegation of authority along the corporate and management
structure.
Over the past few years, the Group has gone through several major Board and management
changes, changes of advisors and contractors, and a significant reduction of staff across its
operations. These changes require additional efforts to ensure proper implementation of
governance, controls, and financial discipline procedures.
Impact: Failure to establish appropriate level of financial discipline, governance and controls
may lead to unnecessary or inappropriate spending, lack of control over procurement,
contracting, investing decisions, and exposure to increased legal, regulatory, or financial
risks.
Health, safety, and environmental risks
Probability +
velocity
Impact
Change from
2016
HIGH
HIGH
I
Responsibility
How do we manage it?
Further information
Acting Chief
There is daily monitoring and reporting of the well and plant performance at all our fields. Production
Regional operations
Executive
data is analysed by our in-house technical expertise. This supports well intervention planning and further
update
Officer
field development.
page 16
Our subsurface and operations specialists and industry-recognised personnel are part of the daily
monitoring and reservoir management process of our field and assets.
HIGH
HIGH
Acting Chief
The Board and the executive team are in the process of a conducting a thorough assessment of existing
Chairman’s statement
Executive
governance and control procedures on a Group and asset levels to identify gaps given Board, staff, and
page 4
Officer
management changes and implement a new framework more appropriate for current circumstances. In
the meantime, existing controls have been strengthened significantly with Executives and the Board
reviewing and approving practically all contracts, payments, and investment decisions.
Financial review
page 24
Description: We are exposed to a wide range of significant health, safety, security and environmental
risks influenced by the geographic range, operational diversity and technical complexity of our oil and gas
exploration and production activities.
HIGH
HIGH
Acting Chief
Health, safety and the environment is a priority of the Board who are involved in the planning and
Corporate social
Executive
implementation of continuous improvement initiatives. A London-based HSECQ Manager reports directly
responsibility
Officer
to the Chief Executive Officer.
Impact: Technical failure, non-compliance with existing standards and procedures, accidents, natural
disasters and other adverse conditions where we operate, could lead to injury, loss of life, damage to the
environment, loss of containment of hydrocarbons and other hazardous material, as well as the risk of
fires and explosions. Failure to manage these risks effectively could result in loss of certain facilities,
with the associated loss of production, or costs associated with mitigation, recovery, compensation and
fines. Poor performance in mitigating these risks could also result in damaging publicity for the Group.
page 28
CEO statement
page 10
The Group HSECQ Manager is responsible for maintaining a strong culture of health, safety and
environmental awareness in all our operational and business activities. The HSECQ Manager reports to
the Board with details of Group performance.
Operations in Ukraine, Russia and Hungary all have a dedicated HSECQ Team of local personnel led by an
HSECQ Manager who reports to the HSECQ Director for that particular region.
All locations have HSE Management Systems modelled on the ISO 9000 series, OHSAS 18001 and ISO
14001.
injuries.
Appropriate insurance policies, provided by reputable insurers, are maintained at Group level to mitigate
the Group’s financial exposure to any unexpected adverse events arising out of the normal operations.
In April 2017 during a planned workover of well 25 in Russia there were delays in the workover due to
a fire on the workover rig. The fire was limited to the rig itself and was promptly put out without any
In February 2018 an accident happened that resulted in the fatality of an operator at PPC. A committee
has been established to conduct a full investigation of the accident. It is expected to conclude in Q2 2018.
JKX Oil & Gas plc Annual Report 2017 37
What is the risk
Responsibility
How do we manage it?
Further information
Probability +
Impact
Change from
velocity
2016
Reservoir and operational performance
Description: Subsurface and operational risks are inherent for our business. The reservoir performance
cannot be predicted with certainty, and operations required for hydrocarbon production are subject to
HIGH
HIGH
I
Acting Chief
Executive
Officer
There is daily monitoring and reporting of the well and plant performance at all our fields. Production
data is analysed by our in-house technical expertise. This supports well intervention planning and further
field development.
Regional operations
update
page 16
Our subsurface and operations specialists and industry-recognised personnel are part of the daily
monitoring and reservoir management process of our field and assets.
HIGH
HIGH
Acting Chief
Executive
Officer
The Board and the executive team are in the process of a conducting a thorough assessment of existing
governance and control procedures on a Group and asset levels to identify gaps given Board, staff, and
management changes and implement a new framework more appropriate for current circumstances. In
the meantime, existing controls have been strengthened significantly with Executives and the Board
reviewing and approving practically all contracts, payments, and investment decisions.
Chairman’s statement
page 4
Financial review
page 24
Description: We are exposed to a wide range of significant health, safety, security and environmental
risks influenced by the geographic range, operational diversity and technical complexity of our oil and gas
HIGH
HIGH
exploration and production activities.
Acting Chief
Executive
Officer
Health, safety and the environment is a priority of the Board who are involved in the planning and
implementation of continuous improvement initiatives. A London-based HSECQ Manager reports directly
to the Chief Executive Officer.
Corporate social
responsibility
page 28
The Group HSECQ Manager is responsible for maintaining a strong culture of health, safety and
environmental awareness in all our operational and business activities. The HSECQ Manager reports to
the Board with details of Group performance.
Operations in Ukraine, Russia and Hungary all have a dedicated HSECQ Team of local personnel led by an
HSECQ Manager who reports to the HSECQ Director for that particular region.
CEO statement
page 10
All locations have HSE Management Systems modelled on the ISO 9000 series, OHSAS 18001 and ISO
14001.
Appropriate insurance policies, provided by reputable insurers, are maintained at Group level to mitigate
the Group’s financial exposure to any unexpected adverse events arising out of the normal operations.
In April 2017 during a planned workover of well 25 in Russia there were delays in the workover due to
a fire on the workover rig. The fire was limited to the rig itself and was promptly put out without any
injuries.
In February 2018 an accident happened that resulted in the fatality of an operator at PPC. A committee
has been established to conduct a full investigation of the accident. It is expected to conclude in Q2 2018.
risks of interruption or failure.
Production from our mature fields at the Novomykolaivske Complex in Ukraine require a high level of
maintenance and intervention to minimize the production decline. In Russia, acidization of deep, high
pressure and high temperature wells and other well maintenance procedures to stabilise production are
required, increasing risk of failure.
Impact: Accurate reservoir performance forecasts from fields in Ukraine and Russia are critical in
achieving the desired economic returns and to determine the availability and allocation of funds for
future investment into the exploration for, or development of, other oil and gas reserves and resources.
If reservoir performance is lower than forecast, sufficient finance may not be available for planned
investment in other development projects which will result in lower production, profits and cash flows.
Inability to ensure continuous operation of wells, flowlines, production facilities and successful execution
of drilling, workover, repair, and enhancement interventions may result in lower production, profits and
cash flows.
In 2017, the Company embarked on a major appraisal program of the Rudenkivske field in Ukraine, with
the results being significantly lower than initially expected. Given the resultant decreased amounts of
liquidity, accuracy of our forecasts is even more important.
Financial discipline and governance
Description: The Group has presence in six countries with major operations in Russia,
Ukraine, and the United Kingdom. Such a complex structure requires rigorous governance
and control procedures to be in place to ensure an appropriate level of financial discipline
and controls, as well as delegation of authority along the corporate and management
structure.
Over the past few years, the Group has gone through several major Board and management
changes, changes of advisors and contractors, and a significant reduction of staff across its
operations. These changes require additional efforts to ensure proper implementation of
governance, controls, and financial discipline procedures.
Impact: Failure to establish appropriate level of financial discipline, governance and controls
may lead to unnecessary or inappropriate spending, lack of control over procurement,
contracting, investing decisions, and exposure to increased legal, regulatory, or financial
risks.
Health, safety, and environmental risks
Impact: Technical failure, non-compliance with existing standards and procedures, accidents, natural
disasters and other adverse conditions where we operate, could lead to injury, loss of life, damage to the
environment, loss of containment of hydrocarbons and other hazardous material, as well as the risk of
fires and explosions. Failure to manage these risks effectively could result in loss of certain facilities,
with the associated loss of production, or costs associated with mitigation, recovery, compensation and
fines. Poor performance in mitigating these risks could also result in damaging publicity for the Group.
JKX Oil & Gas plc Annual Report 2017 38
STRATEGIC REPORT
Principal risks and how we manage them/cont.
What is the risk
Asset integrity
Probability +
velocity
Impact
Change from
2016
Responsibility
How do we manage it?
Further information
Description: Our operations depend on maintaining and adhering to license requirements and related
regulations by set by government authorities in countries we operate in.
Impact: Failure to comply with license obligations and other regulations or requirements may result in
our licenses being suspended or revoked which will require us to suspend production and operations.
MED
HIGH
I
Acting Chief
Status of our licenses and relevant license obligations are monitored on a country level.
Executive
Officer
In 2015, our subsidiary in Russia received notices from two regulatory authorities, Rosnedra and
Rosprirodnadzor, related to obligations to explore deeper Callovian reservoirs in our field. These notices
were addressed in 2017 and will continue to be addressed in 2018.
HIGH
HIGH
review of policies and procedures.
The Board
Compliance related activities include training, monitoring, risk management, due diligence and regular
Corporate social
MED
MED
I
Officer
foreign exchange risk.
page 24
Chief Financial
JKX’s policy is not to hedge commodity price exposure on oil, gas, LPG or condensate and not to hedge
Financial review
Major breach of business, ethical, or compliance standards
Description: The Company is subject to numerous requirements and standards including the UK Bribery
Act, UK Listing Rules, UK Corporate Governance Code, UK Listing Rules and Disclosure and Transparency
Rules, among others. Additionally, some of our stakeholders, such as financial institutions, may require
us to comply with other requirements or ask us to provide information on our business, operations,
employees and shareholders as part of Know Your Client (“KYC”) procedures.
Impact: Failing to comply with onerous regulations and requirements, such as failure to implement
adequate systems to prevent bribery and corruption, could result in prosecution, fines or penalties
imposed on the Company or its officers, suspension of operations or listing.
Inability to clear KYC procedures to satisfaction of the third parties may result in refusal to engage in
business relationships with the Company.
Commodity prices and FX fluctuations
Description: JKX is exposed to international oil and gas price movements, policy developments in Russia
which may affect the regulated gas price, and movements in exchange rates. Such changes will have a
direct effect on the Group’s trading results.
Gas prices in Ukraine are correlated with gas prices in Europe. Since Ukraine stopped purchasing gas
from Russia directly, domestic gas prices were at a premium to those in Europe. Change in gas import
flows may have impact on gas prices in Ukraine, and a prolonged period of low gas prices would impact the
Group’s liquidity.
In Russia, from 1 July 2017 the regulated price which our sales contract is tied to has increased by 3.9%
however, prevailing prices remain significantly lower than in Europe due to existing regulations.
Oil prices recovered from recent historic lows in 2016 and are predicted to not increase further in the
short term by many market commentators. The Company sells the oil it produces at prices determined by
the global oil market.
During 2017, the average Hryvnia exchange rate has depreciated by 4% and average Rouble exchange
rate has appreciated by 15% against the US Dollar.
Impact: A period of low oil and/or gas prices could lead to impairments of the Group’s oil and gas assets
(see Note 5 to the financial statements) and may impact the Group’s ability to support its long-term
capital investment programme (see Liquidity, Funding, and Portfolio Management Risk) and reduce
shareholder returns including dividends and share price.
Corporate social
responsibility
page 28
CEO statement
page 10
responsibility
page 28
Chairman’s statement
page 4
We prohibit bribery and corruption in any form by all employees and by those working for and/or
connected with the business. Employees are expected to report actual, attempted or suspected bribery
or other issues related to compliance to their line managers or through our independently managed
confidential reporting process, which is available to all staff as well as third parties.
In 2017, we engaged an independent consultant to assess our anti-bribery and corruption (“ABC”) policies,
procedures, and practices and we are in the process of implementing recommendations to further
strengthen our ABC framework.
In dealing with the third parties, our policy is to maximize transparency and provide all information
available to address KYC-related procedures and requests.
JKX attempts to maximise its realisations versus relevant benchmarks while keeping credit risk to a
minimum by selling mostly on spot markets and on a prepayment basis, ensuring sales are as closely
matched as possible, in terms of timing and volume, to production.
In 2017, hydrocarbons produced in Ukraine were sold by way of direct contracts with customers or open
and transparent auctions conducted via an independent provider (such as Ukrainian Energy Exchange)
or our own sales platform. As commodity prices in Ukraine closely follow international benchmarks,
significant changes in the exchange rates are reflected in commodity prices providing a natural hedge.
In Russia, all gas produced was sold to a single local gas trading company through a long-term gas sales
contract with prices set in Roubles. Sales price for gas is fixed and is subject to increase according to
changes in a tariff set by relevant regulatory bodies. The Company continues to seek to engage other
buyers of its gas in Russia to improve realisations.
The Group attempts to match, as far as practicable, receipts and payments in the same currency and also
follow a range of commercial policies to minimise exposures to foreign exchange gains and losses.
JKX Oil & Gas plc Annual Report 2017
39
What is the risk
Asset integrity
Probability +
Impact
Change from
velocity
2016
Responsibility
How do we manage it?
Further information
Description: Our operations depend on maintaining and adhering to license requirements and related
regulations by set by government authorities in countries we operate in.
Impact: Failure to comply with license obligations and other regulations or requirements may result in
our licenses being suspended or revoked which will require us to suspend production and operations.
MED
HIGH
I
Acting Chief
Executive
Officer
Status of our licenses and relevant license obligations are monitored on a country level.
In 2015, our subsidiary in Russia received notices from two regulatory authorities, Rosnedra and
Rosprirodnadzor, related to obligations to explore deeper Callovian reservoirs in our field. These notices
were addressed in 2017 and will continue to be addressed in 2018.
HIGH
HIGH
The Board
Compliance related activities include training, monitoring, risk management, due diligence and regular
review of policies and procedures.
We prohibit bribery and corruption in any form by all employees and by those working for and/or
connected with the business. Employees are expected to report actual, attempted or suspected bribery
or other issues related to compliance to their line managers or through our independently managed
confidential reporting process, which is available to all staff as well as third parties.
In 2017, we engaged an independent consultant to assess our anti-bribery and corruption (“ABC”) policies,
procedures, and practices and we are in the process of implementing recommendations to further
strengthen our ABC framework.
In dealing with the third parties, our policy is to maximize transparency and provide all information
available to address KYC-related procedures and requests.
Corporate social
responsibility
page 28
CEO statement
page 10
Corporate social
responsibility
page 28
Chairman’s statement
page 4
Description: JKX is exposed to international oil and gas price movements, policy developments in Russia
which may affect the regulated gas price, and movements in exchange rates. Such changes will have a
MED
MED
I
Chief Financial
Officer
JKX’s policy is not to hedge commodity price exposure on oil, gas, LPG or condensate and not to hedge
foreign exchange risk.
Financial review
page 24
JKX attempts to maximise its realisations versus relevant benchmarks while keeping credit risk to a
minimum by selling mostly on spot markets and on a prepayment basis, ensuring sales are as closely
matched as possible, in terms of timing and volume, to production.
In 2017, hydrocarbons produced in Ukraine were sold by way of direct contracts with customers or open
and transparent auctions conducted via an independent provider (such as Ukrainian Energy Exchange)
or our own sales platform. As commodity prices in Ukraine closely follow international benchmarks,
significant changes in the exchange rates are reflected in commodity prices providing a natural hedge.
In Russia, all gas produced was sold to a single local gas trading company through a long-term gas sales
contract with prices set in Roubles. Sales price for gas is fixed and is subject to increase according to
changes in a tariff set by relevant regulatory bodies. The Company continues to seek to engage other
buyers of its gas in Russia to improve realisations.
The Group attempts to match, as far as practicable, receipts and payments in the same currency and also
follow a range of commercial policies to minimise exposures to foreign exchange gains and losses.
Major breach of business, ethical, or compliance standards
Description: The Company is subject to numerous requirements and standards including the UK Bribery
Act, UK Listing Rules, UK Corporate Governance Code, UK Listing Rules and Disclosure and Transparency
Rules, among others. Additionally, some of our stakeholders, such as financial institutions, may require
us to comply with other requirements or ask us to provide information on our business, operations,
employees and shareholders as part of Know Your Client (“KYC”) procedures.
Impact: Failing to comply with onerous regulations and requirements, such as failure to implement
adequate systems to prevent bribery and corruption, could result in prosecution, fines or penalties
imposed on the Company or its officers, suspension of operations or listing.
Inability to clear KYC procedures to satisfaction of the third parties may result in refusal to engage in
business relationships with the Company.
Commodity prices and FX fluctuations
direct effect on the Group’s trading results.
Gas prices in Ukraine are correlated with gas prices in Europe. Since Ukraine stopped purchasing gas
from Russia directly, domestic gas prices were at a premium to those in Europe. Change in gas import
flows may have impact on gas prices in Ukraine, and a prolonged period of low gas prices would impact the
Group’s liquidity.
In Russia, from 1 July 2017 the regulated price which our sales contract is tied to has increased by 3.9%
however, prevailing prices remain significantly lower than in Europe due to existing regulations.
Oil prices recovered from recent historic lows in 2016 and are predicted to not increase further in the
short term by many market commentators. The Company sells the oil it produces at prices determined by
the global oil market.
During 2017, the average Hryvnia exchange rate has depreciated by 4% and average Rouble exchange
rate has appreciated by 15% against the US Dollar.
Impact: A period of low oil and/or gas prices could lead to impairments of the Group’s oil and gas assets
(see Note 5 to the financial statements) and may impact the Group’s ability to support its long-term
capital investment programme (see Liquidity, Funding, and Portfolio Management Risk) and reduce
shareholder returns including dividends and share price.
JKX Oil & Gas plc Annual Report 2017
40
STRATEGIC REPORT
Principal risks and how we manage them/cont.
JKX Oil & Gas plc Annual Report 2017
and Russian business environments and future expectations
regarding country and currency risks that the Group may
encounter, as disclosed in the risks above.
Principal risks facing the Group
For the purposes of assessing the Group’s viability, the Directors
focused on the following principal risk which is critical to the
Group’s success but which is outside the control of management
and could have a significant impact on the business:
•
Inadequate liquidity levels to settle legal disputes
The Company has persistently defended its position in the
Ukrainian courts regarding the Rental Fee charges levied for
2010 and 2015 totalling approximately $37.1 million (including
interest and penalties, see Note 27 to the consolidated financial
statements). Whilst the tribunal ruling poses additional
challenges for the Company, in particular regarding the 2015
claims (totalling $25.8 million), the Company will continue to
defend its position in the Ukrainian courts in all outstanding
cases.
The Company’s Ukrainian subsidiary, PPC, has recognised
total provisions of $37.1 million in relation to separate court
proceedings over the amount of Rental Fees paid in Ukraine for
2010 and 2015.
In addition, beginning in 2015 the Company lodged several
claims under the Agreement between the United Kingdom
and Ukraine for the Promotion and Reciprocal Protection of
Investments (the “UK-Ukraine BIT”) for excessive royalties and
production taxes (‘Rental Fees’) paid by PPC plus damages. In
February 2017, the tribunal awarded the Company damages
of approximately $11.8 million plus interest and costs of $0.3
million in relation to subsidiary claims. There is no guarantee
that the Company will secure receipt of these damages and costs
in the near future.
Confirmation of longer-term viability
The Board has undertaken a robust assessment of these risks
and the other principal risks faced by the business detailed
on pages 34 to 40 of the Annual Report. The Directors are
implementing further operational and cash management
measures, and may be required to implement other
restructuring and/or refinancing options, to settle amounts
that may become payable in relation to the 2010 and 2015 Rental
Fee claims, if and when they become payable. Assuming that
the outstanding Rental Fee claims can be managed through
successful court action or a negotiated payment plan with the
Ukrainian Government, based on the Group’s cash flow forecasts,
the Directors believe that the combination of its current cash
balances, expected future production and resulting net cash
flows from operations provide a reasonable expectation that the
Company will continue to be viable and meet its liabilities over
the assessment period.
Long term viability statement
At the date of this report, a material uncertainty has been
identified that may cast significant doubt about the Group’s
and Company’s ability to continue as a going concern. The
circumstances giving rise to this material uncertainty is
discussed in Note 2 to the financial statements.
Notwithstanding this material uncertainty, the Directors have
assessed the viability of the Group over a three-year period to
31 December 2020, taking account of the Group’s current
position and the potential impact of the principal risks
documented above.
Summary of the strategic review by country
•
•
•
Ukraine. We have moved forward with implementing our
production enhancement plan in Ukraine. The current plan
for 2018 includes workovers of 10 more wells (including
on three wells that belong to the state), as well as 4 side
tracks. We are also planning to begin drilling a new well
on our Elizavetovskoye field shortly. Early results will be
used to develop a longer- term production plan for Ukraine.
In addition, we have started to systematically review
opportunities for acquisition and new licensing in Ukraine.
Russia. Operations, production and cash flow are now stable
in Russia. Further growth in production can be obtained
from workover of well 5 or other existing well(s).
Hungary and Slovakia. After a review of the Group’s
portfolio by the Board, it has been decided to focus on our
Ukrainian and Russian operations. Therefore, the Board
has initiated disposal of our assets in Hungary, while the
company has relinquished its position in Slovakia.
More detail on these opportunities and the Company’s plans is
provided on pages 10 to 11.
The new Board believes that the Group’s assets and staff provide
a good platform to consolidate and improve on its existing oil and
gas opportunities.
The Group has been operating in Ukraine for over 20 years and
in Russia for over 10 years. Most of the Group’s profits and cash
flows continue to be generated in Ukraine and, to lesser extent,
in Russia. However there remain significant risks associated
with operating in these emerging markets in general, and
operating our assets specifically, which could adversely impact
cash flows, profits and liquidity of the Group.
Assessment of viability
The Board closely monitors and manages its liquidity risk
using cash flow forecasts which are regularly produced and
applies sensitivities for different scenarios including, but not
limited to, changes in oil and gas prices, changes to production
and other tax rates in relation to the Group’s producing assets,
increased operating and capital expenditure, changes in Rouble
and Hryvnia exchange rates, various scenarios for reservoir
performance, and delays to additional future revenue. These
sensitivities are applied both individually and in unison.
Downside sensitivities were modelled to test the impact of using
a range of external forward oil and gas price curves. The testing
incorporated the use of mitigating actions available to the
business, such as a reduction in capital expenditure and further
reducing operating costs safely and responsibly.
Capital and operating costs were based on approved budgets and
latest forecasts in the case of 2018 and current development
plans in the case of 2019 through to December 2020. In addition,
the Directors made enquiries into and considered the Ukrainian
41
JKX Oil & Gas plc Annual Report 2017
Governance and Financial statements
Governance
Board composition
Corporate governance
Audit Committee Report
Directors’ Remuneration Report
Directors’ report - other disclosures
Financial statements
Group
Independent Auditors’ Report
Consolidated income statement
Consolidated statement of comprehensive income
Consolidated statement of financial position
Consolidated statement of changes in equity
Consolidated statement of cash flows
Notes to the consolidated financial statements
Company
Independent Auditors’ Report
Company statement of financial position
Company statement of changes in equity
Notes to the Company financial statements
42
44
53
61
74
78
85
86
87
88
89
90
126
131
132
133
42
JKX Oil & Gas plc Annual Report 2017
GOVERNANCE
Board composition
Hans Jochum Horn Non Executive Chairman
Appointed –24 October 2017
Experience –worked in emerging markets for more than 25 years, primarily in
Russia/CIS and Africa. Previous experience included roles as CEO and Chairman of the
Board of Rendeavour, Africa’s largest urban developer, CEO and Chairman of the Board
of Renaissance Group, and a director and head of the Audit Committee of Uralkali and
Eurochem.
Hans Jochum Horn was the Country Managing Partner for Russia / CIS from 1990 to 2005
at Arthur Andersen and subsequently Ernst & Young. He has been a frequent advisor to
governments and regional authorities in CIS and Africa.
Hans Jochum holds an MA in Accounting and Auditing from the Norwegian School of
Economics, as well as an MBA from the University of Mannheim, Germany. He has
served as Chairman of the Norwegian Association of MBA Graduates, was the founding
member of the German Chamber of Commerce in Russia, and former President of Junior
Achievement Russia.
Adrian Coates Non Executive Director, Senior Independent Director.
Appointed - 8 December 2017
Experience – is currently a Non Executive director of Petropavlovsk PLC, a UK
premium listed gold mining company with assets in Russia and a Non Executive director
of Thor Explorations ltd, a TSX-V listed mining exploration and development company
with assets in West Africa. He was a Non Executive Director of Regal Petroleum from
2008 to 2017 and of Polyus Gold from 2010 to 2015. Mr. Coates has many years’
experience in the investment banking industry, having held positions with HSBC, UBS
and Credit Suisse First Boston, with a specialisation in the natural resources sector.
Mr. Coates holds a Master’s degree in Economics from University of Cambridge and an
MBA from the London Business School and is currently the Senior Independent
Director.
Michael Bakunenko Non Executive Director
Appointed –8 December 2017
Experience – an Executive Chairman of the Board at PJSC Ukrnaftoburinnya, the third
largest private oil and gas E&P Company in Ukraine since September 2015. From 2011
to 2015 Mr. Bakunenko was Deputy Board Chairman, Director of Corporate
Development and Strategy at PJSC Ukrnafta, the largest oil company in Ukraine. Prior
to this Mr. Bakunenko worked for 8 years in the investment banking industry, notably
at Goldman Sachs in New York and Renaissance Capital in Moscow and Kiev. Mr.
Bakunenko holds a Bachelor’s degree from Lehigh University and Master’s degree from
Columbia University.
Christian Bukovics Non Executive Director
Appointed – 9 February 2018
Experience – currently a director at AEEV Ltd, pursuing low-cost onshore oil
opportunities in the CIS. Until 2013, Christian worked for Shell for 33 years, based in
eight countries on four continents. From 2006 to 2013 he was Exploration VP for Russia
and the CIS region, a member of Shell’s global exploration leadership team and board
chairman of CMOC during part of that period. Earlier roles included VP Commercial for
Global Exploration, GM Shell Technical Services Iran and GM Shell Temir (Kazakhstan).
Mr. Bukovics holds a PhD in Physics from University of Vienna.
43
JKX Oil & Gas plc Annual Report 2017
Vladimir Rusinov Non Executive Director
Appointed – 8 December 2017
Experience – joined Proxima Capital Group in 2015 as Managing Director. Prior to that
Mr Rusinov worked at leading Russian and international investment banks for 20 years
with a particular focus on oil and gas in Russia and the CIS, including as Managing
Partner at VNR Capital, an investment banking advisory firm, Managing Director and
Head of Oil and Gas at Renaissance Capital, Director at ABN AMRO Oil and Gas Group,
Vice President in the European Energy & Power Group at Merrill Lynch and an associate
in M&A, Corporate Finance and European Energy & Power Departments at Goldman
Sachs International. Mr Rusinov had previously been a director of the company from 28
January 2016 until 30 June 2017. Mr Rusinov holds a MA (Hons) Degree in International
Economics from Kiev State University and MBA Degree from Nijenrode Business
University, the Netherlands School of Business.
Andrey Shtyrba Non Executive Director
Appointed – 24 October 2017
Experience – currently CEO of Stevedores Yamal LLC, a logistics company operating in
Russia. Previously Andrey was Managing Director of Sovfrakht Management Company
LLC (which provides logistics in Russia and Ukraine), a Managing Director of Alfa
Capital Partners, Director of Corporate Finance and Vice President of Alfa Bank as well
as holding positions with Credit Swiss First Boston and KPMG’s audit and tax practice.
Andrey holds a degree (with Honours) in Economics from the Finance Academy in
Moscow.
Vladimir Tatarchuk Non Executive Director
Appointed – 28 January 2016
Experience – has been the Chairman and Chief Executive Officer at Proxima Capital
Group since 2013. From 2011 to 2013 Mr Tatarchuk served as First Deputy Chairman of
the Executive Board and Head of Corporate-Investment Banking at Alfa Bank. From
1998 to 2011 he held many posts at Alfa Bank including Head of Corporate Banking, Co-
Head of Corporate-Investment Banking, Deputy Chairman of the Executive Board,
Deputy Head of Corporate Finance and Vice President, and also served on the Board of
Directors of Alfa Bank in Ukraine. Mr Tatarchuk holds a degree in law from the
Lomonosov Moscow State University and a diploma in executive management from the
leading international business school INSEAD.
44
JKX Oil & Gas plc Annual Report 2017
GOVERNANCE
Corporate governance
Governance principles
The Company has a premium listing on the London Stock Exchange and is subject to the Listing Rules of the UK Listing Authority. The
Board is committed to applying the principles of the UK Corporate Governance Code (‘the Code’) and relevant institutional shareholder
guidelines. This section explains in more detail how we have applied these provisions.
JKX’s Group-wide policies and procedures provide a framework for governance and are underpinned by the Group’s Code of Conduct.
Good governance is taken seriously and the Board set the tone and take the lead to ensure that good practice flows throughout the
Group.
Governance framework
Chairman
BOARD
Non Executive Chairman,
Six Non Executive Directors (including three independent
Non Executive Directors)
Nomination
Committee
Group Risk
Committee
Audit
Committee
Acting Chief
Executive Officer
Remuneration
Committee
PPC Risk Committee
YGE Risk Committee
Principal subsidiary Boards:
PPC General Director,
YGE General Director
JKX Board changes during 2017
At the Annual General Meeting of the Company held on 30th June 2017, shareholders voted not to reappoint three Board members
(Tom Reed, Russell Hoare and Vladimir Rusinov). Of the remaining four Directors, three gave notice and resigned with effect from
24th October 2017 (Paul Ostling, Bernie Sucher and Alan Bigman). At a board meeting held on 24th October Andrey Shtyrba and
Hans Jochum Horn were appointed as Directors, and at a board meeting held on 8th December Vladimir Rusinov, Adrian Coates and
Michael Bakunenko were then appointed as Directors.
Due to these highly unusual circumstances from 24th October until 8th December 2017 when a new independent Non Executive
Director was appointed, the composition of the Board did not comply with UK Corporate Governance Code (‘the Code’) in respect of
the number of independent Non Executive Directors.
In the period from 24th October until 8th December 2017, Mr Hans Jochum Horn (as Chairman) and Andrey Shtyrba constituted
the Audit Committee and carried out the functions required under UKLA's Disclosure and Transparency Rules.
In the period from 24th October until 8th December 2017, Vladimir Tatarchuk was the sole member of the Remuneration
Committee.
In the period from 24th October until 2nd November the Nomination Committee was not constituted. In the period from 2nd
October until 8th December 2017, Andrey Shtyrba (as Chairman) and Mr Hans Jochum Horn constituted the Nomination
Committee.
On 8th December 2017, following a search by an independent executive search consultant, Adrian Coates was appointed to the
Board as an independent Non Executive Director. This made the Board composition compliant with the Code. Adrian Coates was
also appointed to the Audit and Nomination Committees and as Senior Independent Director on the same date.
On the 8th December Michael Bakunenko and Vladimir Rusinov were appointed to the Board as Non Executive Directors and
members of the Audit Committee, and Andrey Shtyrba and Hans Jochum Horn were appointed to the Remuneration Committee in
addition to Vladimir Tatarchuk
45
JKX Oil & Gas plc Annual Report 2017
On 9th February 2018 Christian Bukovics was appointed to the Board as a Non Executive Director and a member of the
Remuneration and Nomination Committee.
The Group is now led by an experienced Board of directors consisting of a Non Executive Chairman, three independent Non
Executive Directors and three Non Executive Directors, two of whom represent the interests of Proxima, JKX’s second largest
shareholder with a holding of almost 20% and one of whom represents the interests of Eclairs, JKX’s largest shareholder with a
holding of over 27%.
Board effectiveness
Role of the Board
The Board provides leadership to the Group. Key matters reserved for the consideration and the approval of the Board are:
setting and monitoring Group strategy;
review of Group business plans, trading performance and costs;
review and approval of the annual operating and capital expenditure budgets;
approval of capital investment projects across the Group;
examination of acquisition opportunities, divestment possibilities and significant financial and operational issues;
remuneration policy (through the Remuneration Committee);
appointments to the Board (through the Nominations Committee) and senior management, Committee membership and
remuneration for Directors and senior management;
review and approval of the Company’s financial statements (through the Audit Committee);
setting any interim dividend and recommendation of the final dividend; and
ensuring that significant business risks are actively monitored and managed using robust control and risk management systems.
In addition, the Board considers strategy in depth as well as reviewing the strategic objectives of the Company at each of its Board
meetings.
All other authorities are delegated by the Board, supported by appropriate controls, to the (Acting) Chief Executive Officer or Chief
Financial Officer on behalf of senior management.
How the Board functions
The Board has historically held six scheduled meetings each year, and arranges additional meetings if the need arises. During 2017,
there were 9 unscheduled Board meetings (2016: five ), including one meeting at which the Non Executive Directors met in private
session, with an open agenda to discuss the current issues affecting the Group (2016: once). The increase in the number of unscheduled
Board meetings in 2017 was needed for the Board members to build a strategic direction for the Company and to address ongoing
developments.
The Chairman, in consultation with the Directors and senior executives, sets the agenda for Board meetings. All Directors receive
comprehensive documentation prior to each meeting on the matters to be discussed.
Monthly Board reporting
The Group provides the Board with a short “flash” report on monthly performance 5 working days after the month end. The monthly
reports outline all material operational, financial, commercial and strategic developments.
The monthly financial reports consolidate all financial information from all parts of the Group and include actual performance against
budget and forecast for oil and gas production, sales and costs.
These reports provide the Board with the latest information on cash, cash flow forecast, receivables and payables and the implications
of key sensitivities including changes in production, commodity prices, production taxes and exchange rates. These monthly reports
ensure that members remain properly briefed on the performance and financial position of the Group.
Board meeting documents
Prior to each set of meetings the Chairman ensures that all the relevant papers and other information is delivered, where possible, at
least five days in advance of the meeting date so that all Directors have the necessary time to review in detail the latest information.
Support for Directors
The Board has adopted a policy whereby Directors may, in the furtherance of their duties, seek independent professional advice at the
Company’s expense.
Each Director has the benefit of a deed of indemnity from the Company and its subsidiaries in respect of claims made and liabilities
incurred, in either case arising out of the bona fide discharge by the Director of his or her duties. The Company has also arranged
appropriate insurance cover in respect of legal action against Directors of the Company and its subsidiaries.
46
JKX Oil & Gas plc Annual Report 2017
GOVERNANCE
Corporate governance
Committees of the Board in 2017
As explained on page 44, Tom Reed, Russell Hoare and Vladimir Rusinov were not reappointed as Directors at the Annual General
Meeting held on 30th June 2017, and Paul Ostling, Alan Bigman and Bernie Sucher resigned as Directors with effect from 24th October
2017. During the period between 24 October and 8 December the Company was not able to form the various committees (Audit,
Remuneration and Nomination) in a form which was compliant with the Code.
During 2017, up until 24th October 2017 and from 8th December 2017 the Board had three committees focusing on specialist areas,
which were ultimately accountable to the Board. These comprised:
the Audit Committee;
the Nominations Committee; and
the Remuneration Committee.
The Board committees met independently and provided feedback to the main Board through their chairmen.
Committee memberships from 1st January 2017 until 24th October 2017
Audit Committee
Remuneration Committee
Nomination Committee
Paul Ostling
Alan Bigman
Bernie Sucher
Vladimir Tatarchuk
Member
Chairman
Member
–
Vladimir Rusinov (until 30th June 2017)
Member
Member
Member
Chairman
Member
–
Chairman
Member
Member
–
–
In the period from 24th October until 8th December 2017, Mr Hans Jochum Horn (as Chairman) and Andrey Shtyrba constituted the
Audit Committee and carried out the functions required under UKLA's Disclosure and Transparency Rules.
In the period from 24th October until 8th December 2017, Vladimir Tatarchuk was the sole member of the Remuneration
Committee.
In the period from 24th October until 2nd November the Nomination Committee was not constituted. In the period from 2nd October
until 8th December 2017, Andrey Shtyrba (as Chairman) and Mr Hans Jochum Horn constituted the Nomination Committee.
On 8th December 2017 Adrian Coates was appointed to the Audit and Nomination Committees.
On the 8th December Michael Bakunenko and Vladimir Rusinov were appointed to the Audit Committee, and Andrey Shtyrba and
Hans Jochum Horn were appointed to the Remuneration Committee in addition to Vladimir Tatarchuk
Committee memberships from 8th December 2017 until year end
Hans Jochum Horn
Adrian Coates
Vladimir Rusinov
Andrey Shtyrba
Michael Bakunenko
Vladimir Tatarchuk
Audit Committee
Remuneration Committee
Nomination Committee
Member
Chairman
Member
Member
Member
–
Member
–
-
Chairman
–
Member
Chairman
Member
–
Member
–
–
The roles and activities of each of these committees during 2017 are noted on pages 49, 53 and 66.
Board composition, independence and commitment
Up until the General Meeting on 30th June 2017, the Board of 7 members comprised:
a Non Executive Chairman,
two Executive Directors and
two Non Executive Directors representing the interests of Proxima, JKX’s second largest shareholder with a holding of almost 20%
two independent Non Executive Directors
47
JKX Oil & Gas plc Annual Report 2017
Following the General Meeting on 30th June 2017, (see above), the Board of 4 comprised:
a Non Executive Chairman,
a Non Executive Director representing the interests of Proxima, JKX’s second largest shareholder with a holding of almost 20%, and
two independent Non Executive Directors.
Following the resignation of Mr Paul Ostling, Mr Bernie Sucher and Alan Bigman on 24th October 2017, (see above) and the Board
Meetings on the same day , the Board of 3 comprised:
a Non Executive Chairman, and
a Non Executive Director representing the interests of Proxima, JKX’s second largest shareholder with a holding of almost 20%
an independent Non Executive Director.
Following appointment of Michael Bakunenko, Adrian Coates and Vladimir Rusinov on 8th December 2017 and Mr Christian Bukovics
on 9th February 2018, the Board of 7 now comprises:
a Non Executive Chairman, and
2 Non Executive Director representing the interests of Proxima, JKX’s second largest shareholder with a holding of almost 20%
1 Non Executive Director representing the interests of Eclairs, JKX’s largest shareholder with a holding of over 27%
3 independent Non Executive Directors.
It is the Board’s view that the current Non-Executive Directors have sufficient time to fulfil their commitments to the Company and no
Executive Director holds a Non-Executive Directorship, or Chairmanship, in a FTSE 100 company. The Board also regularly considers
the appropriateness of Board composition.
Board skills, experience and responsibilities
The Board has significant knowledge and experience of the oil and gas industry, engineering and financial matters, working in central
and eastern Europe, particularly Ukraine and Russia, and turn-around and restructuring situations within the region. The key
biographical details, relevant experience and responsibilities of each Director are provided on pages 42 and 43.
The Non Executive Directors bring the skills and expertise necessary to challenge effectively, independently and constructively, the
performance of the Executive and its strategy.
Board diversity
During the period covered by this report the Board consisted entirely of men with 5 different nationalities.
Gender is only one aspect of diversity, and there are many other attributes and experiences that can improve the board’s ability to act
effectively. Our policy is to search for the highest quality people with the most appropriate experience for the requirements of the
business, be they men or women.
The Board supports the longer term aspirations of Lord Davies’ report regarding gender diversity on appointment of directors to boards
and will maintain its practice of embracing diversity in all its forms, but has chosen not to set any measurable objectives.
Senior Independent Director
Bernie Sucher was Senior Independent Director (‘SID’) following his appointment on 1 April 2016 until the date of his resignation on
24th October. Adrian Coates was appointed as SID on 8th December 2017.
The SID is available for discussions with other Non Executive Directors who may have concerns which they believe have not been
properly considered by the Board as a whole.
A key responsibility of the SID is to ensure he is available to shareholders if they have concerns that have not been resolved by contact
through the normal channels of Chairman, (Acting) Chief Executive Officer or other Executive Directors, or where such contact is
inappropriate.
2017 Board evaluation process
Following the Board changes in 2016 and 2017, it was considered appropriate to defer the process of evaluating the performance of all
the new Directors and committees in 2017. The Chairman will conduct one to one interviews with the Board and its committees and the
Senior Independent Director will review the performance of the Chairman during 2018.
External evaluation
As the Company is outside of the FTSE 350 there is no requirement for an externally-facilitated evaluation of the Board at least every
three years. The Board will consider the relevance of an externally facilitated evaluation during once the Board has been embedded.
Development of the Board
All Directors are provided opportunities for further development and training updates. In addition to the regular updates on
governance, legal and regulatory matters, the Board also receives detailed briefings from advisers and at their seminars on a variety of
topics that are relevant to the Group and its strategy.
48
JKX Oil & Gas plc Annual Report 2017
GOVERNANCE
Corporate governance
Board activities
Attendance at meetings
In addition to six scheduled Board meetings, there were nine unscheduled meetings convened at short notice (2017: six).
When a Director is unable to participate in a meeting either in person or remotely because of another engagement, they are provided
with the briefing materials and the Chairman will solicit their views on key items of business ahead of time, in order for the views to be
presented at the meeting and influence the debate.
The number of meetings of the Board and its committees during 2017 and individual attendance by Director is shown below:
Board and Committee meeting attendance in 2017
Number of meetings
Attendance/Eligibility:
Hans Jochum Horn2,5,7
Andrey Shtyrba2,5,7
Adrian Coates4,5,6
Michael Bakunenko4,6
Vladimir Rusinov3,4,6
Board
15
Board
3/3
2/3
1/1
1/1
8/8
Vladimir Tatarchuk
14/15
Paul Ostling1
Tom Reed3
Russell Hoare3
Alan Bigman1
Bernie Sucher1
12/12
7/7
7/7
12/12
12/12
Audit Committee
Remuneration Committee
Nomination Committee
5
3
3
Audit Committee
Remuneration Committee
Nomination Committee
1/1
1/1
1/1
1/1
1/1
-
4/4
-
-
4/4
4/4
1/1
1/1
-
-
-
2/3
2/2
-
-
2/2
2/2
1/1
1/1
1/1
-
-
-
2/2
-
-
2/2
2/2
1. Paul Ostling , Alan Bigman and Bernie Sucher resigned as Directors on 24 October 2017
2. Andrey Shtyrba and Hans Jochum Horn were appointed as Directors on 24th October 2017 and also appointed to the Audit committee on the same date
3. Russell Hoare Tom Reed and Vladimir Rusinov were not reappointed as Directors on 30th June 2017
4. Michael Bakunenko, Vladimir Rusinov and Adrian Coates were Appointed as a Directors with effect from 8th December 2017
5. On 2nd November 2017 Hans Jochum Horn and Andrey Shtyrba and on 8th December Adrian Coates were appointed to the Nomination Committee.
6. On 8th December 2017 Vladimir Rusinov, Adrian Coates and Michael Bakunenko were appointed to the Audit Committee
7. On 8th December 2017 Andrey Shtyrba, Hans Jochum Horn were appointed to the Remuneration Committee; and
8. Vladimir Tatarchuk was appointed as a Director on 28th January 2016
Senior management from across the Group, and advisers, attend some of the meetings for the discussion of specific items in greater
depth. This is important to the Board as it further enhances the Board’s understanding of operations and the implementation of
strategy.
Board’s work during 2017
As described on page 44 Alan Bigman, Paul Ostling and Bernie Sucher resigned on 24th October 2017. After that date there was no
independent Non Executive Director who had been a member of the Board prior to that date. In view of this lack of continuity the
details set out in this section that relate to the period prior to 24th October are based on the minuted discussions of the Board.
During the year the Board used a rolling agenda of strategy, finance, operations, commercial matters, corporate governance and
compliance including the matters set out below. All Directors have the authority to add any item to the Board agenda.
the (Acting) Chief Executive’s report on strategic, and operational matters including political and economic developments,
particularly in Ukraine
the Chief Financial Officer’s report which includes a report of actual performance against budget, reforecasting, updates on oil, gas
and condensate prices;
HSECQ matters;
Additional funding opportunities;
Compliance (including ABC) issues.
where applicable, reports from the Nominations Committee, Audit Committee and Remuneration Committee.
49
JKX Oil & Gas plc Annual Report 2017
In addition to the standing agenda items and annual Board responsibilities in respect of the Group’s reporting, other topics covered by
the Board during the year included:
the implementation of a new vision for the Company and a field development plan using technology and knowledge transfer from US
into Ukraine
managing the Group’s liquidity including the payment of interest on the existing Convertible Bond
reduction in overhead costs and improved efficiency through the implementation of staff cuts in London, Ukraine and Russia
management of the arbitration proceedings against Ukraine under the Energy Charter Treaty and other relevant investment
treaties in addition to the management of other production tax related proceedings in the Ukrainian courts
increased engagement with Governmental bodies in Ukraine
increased transparency and engagement with shareholders regarding production and operations with the implementation of a
regular reporting schedule.
In the period from 24th October the Board also considered a number of additional matters as a priority including:
Reconstituting the Board and its committees with the skills and experiences required to address the challenges that the Company
faced and in order to comply with the requirements of applicable legislation and the Code;
Identifying and addressing critical gaps in the senior management team;
Introducing enhanced management information updates focussing on key parameters including production, liquidity and future
cashflow;
Introducing enhanced monitoring and control processes centralised to the Board appropriate to the Company’s financial position -
focussing in particular on procurement, cost and payment;
Overhaul of the capex approval process by ensuring that appropriate screening criteria such as risk, payback period, cashflow impact
and return on investment are considered;
Development of a future strategy reflecting the Company’s position and its opportunities and challenges;
Review and management of ongoing tax and other litigation;
Identifying sources of third party financing and arranging for a standby facility; and
Prioritisation of the 2018 group budgeting process.
Re-electing your Board
The Board contains a broad range of experience and skills from a variety of industries and advisory roles, which fully complement each
other.
All the independent Non Executive Directors (including the Chairman) stood down and were reappointed at the EGM held on 22nd
March 2018. Of the remaining Directors one (Vladimir Tatarchuk) was reappointed at the 2016 Annual General Meeting and two were
appointed to the Board on 8th December 2017.
As the Company is outside of the FTSE 350 there is no requirement for all Board members to be subject to annual re-election by
shareholders. Michael Bakunenko and Vladimir Rusinov will stand for re-election at the 2018 Annual General Meeting, as they have
been appointed to the Board since the last AGM.
Full biographies of all the Directors can be found on pages 42 and 43.
Nomination Committee
The role of the Nomination Committee is to review the structure, size, skills and composition of the Company Board and the Boards of
companies owned by JKX Oil & Gas plc. The Committee also considers succession planning and suitable nominations for appointments
to the Boards, and makes appropriate recommendations based on qualifications and experience.
The Committee meets as often as it determines is appropriate. Generally it meets at least once a year and more frequently if required.
Committee member since
To
Number of meetings in 2017
Attendance/Eligibility
Hans Jochum Horn
November 17
Andrey Shtyrba
Adrian Coates
Alan Bigman
Bernie Sucher
Paul Ostling
November 17
December 17
April 2016
April 2016
April 2016
present
present
present
October 17
October 17
October 17
1/1
1/1
1/1
2/2
2/2
2/2
The Committee met 3 times during 2017 (2016: once). As noted above, following the removal of the Executive Directors at the AGM held
on 30th June 2017 and the resignation of the remaining independent Directors on 24 October 2017 a new Nomination Committee was
not established until 2nd November 2017.
50
JKX Oil & Gas plc Annual Report 2017
GOVERNANCE
Corporate governance
New independent Non Executive Directors were appointed in 2017 following a search by an independent search consultant (Drax) that
has no other connection with the Group , as well as Non Executive Directors representing the interests of the 2 most significant
shareholders.
Membership and process
Until 24th October 2017, the Nomination Committee comprised three independent Non Executive Directors (Paul Ostling, Bernie
Sucher and Alan Bigman) who resigned from the Board with effect from that date. Following these resignations there was no member
of the Committee who had been a member of the Committee prior to that date. In view of this lack of continuity the details set out in
this section that relate to the period prior to 24th October are based solely on the minuted discussions of the Nomination Committee.
The Nomination Committee was reconstituted on 2nd November 2017 and comprised Hans Jochum Horn (as Chairman) and Andrey
Shtyrba, although in the absence of further independent Non Executive Directors it was not compliant with the Code. On 8th December
2017, Adrian Coates was appointed as an independent Non Executive Director and member of the Nomination Committee which then
consisted of Hans Jochum Horn (as Chairman), Adrian Coates and Andrey Shtyrba and was compliant with the Code.
The Chairman ensures that any new Directors are provided with a full induction on joining the Board. The letters of appointment of
each Non Executive Director are available for inspection at the registered office of the Company.
Succession planning
The Board is responsible for succession planning for Directorships and key management roles. This requires performance and talent
assessment, to ensure that able successors for key roles are identified and then provided with suitable opportunities through career
and personal development plans. It is crucial that we remunerate our most talented people fairly and properly, such that they are more
likely to stay in our employment.
Remuneration Committee
Details of the work of the Remuneration Committee is given in the Remuneration report on pages 61 to 73.
Compliance
Compliance with the UK Corporate Governance Code
The Board believes that during 2017 the Company was fully compliant with the provisions set out in the UK Corporate Governance
Code, with the following exceptions:
i) As noted on page 44 above, from 24th October 2017 to 8th December 2017, the composition of the Board did not comply with the Code
in respect of the number of independent Non Executive Directors and certain Committees were accordingly either not constituted, or
constituted but did not comply with the Code. From 8th December 2017 all Committees were constituted but the membership of the
Remuneration Committee and Audit committee are not in compliance with the Code as a result of the membership of Directors who
are not independent in order to ensure full transparency with significant shareholders.
Internal control and risk management
The Board has overall responsibility for the Group’s system of internal control and for reviewing its effectiveness. The internal control
systems are designed to meet the particular needs of the Group and to manage rather than eliminate the risk of failure to achieve
business objectives. Such systems can only provide reasonable and not absolute assurance against material misstatement or loss.
The Board is responsible for identifying and evaluating the major business risks faced by the Company and for determining and
monitoring the appropriate course of action to manage these risks. The Audit Committee reviews the Company’s internal control
processes and risk management systems and reports its conclusions to the Board.
Following the resignation of all the independent directors on 24th October and the appointment of the current Board the current
Board, together with the Audit Committee, has carried out a risk based review of the effectiveness of the Company’s internal control
and risk management systems and has introduced a number of interim measures to strengthen them, including steps to bolster the
authorisation of procurement of all services and the central oversight to all payments across the Group. This work is ongoing.
Specifically, a breakdown in controls occurred in the Company’s Ukrainian subsidiary during 2017. Several legal advisers were engaged
without a proper transparent tender process. These advisers were paid legal fees of approximately $1 million, for which there is a lack
of documentation supporting the nature and extent of work performed. As a result , the Audit Committee appointed KPMG to conduct a
forensic examination of the process for appointment of legal advisers in the Ukraine, the manner in which these specific payments
were made and to investigate the nature of such payments and services provided. As at the date of this release, KPMG’s investigation
has recently been concluded and management has already implemented certain of the recommendations provided in their report.
Other than this issue, the Board has concluded that for the period up until the date of the Annual Report the Company’s current
procedures, policies and systems as reinforced by the interim measures referred to above are appropriate and suitable to enable the
Board to safeguard shareholders’ investment and the Company’s assets, and comply with Turnbull Guidance.
The Board has carried out a robust assessment of the principal risks facing the Company, including those that would threaten its
business model, future performance, solvency or liquidity. Details of the principal risks and how they are managed or mitigated is
included on pages 32 to 40. Further information on internal control and risk management is set out in the Audit Committee Report on
page 53.
51
JKX Oil & Gas plc Annual Report 2017
Budgetary process
Each year the Board reviews and approves the Group’s annual budget with key risk areas identified. The preparation of the annual
Group budget is a multi-stage comprehensive process led by the Chief Financial Officer who works closely with local managers of
operating subsidiaries in Russia and Ukraine, and other managers with specific responsibilities for the Hungarian, Slovakian and other
operations.
Performance is monitored through the monthly reporting to the Board of variances from the budget. Relevant action is taken by the
Board throughout the year based on updated forecasts which are prepared using current information on the key risk areas and
sensitivities.
Investment appraisal
For each capital intensive project there is a rigorous project analysis and risk and return appraisal completed using technical, financial,
commercial, and operational specialists across the Group. The new Board is reviewing the approach to ensure the most effective
allocation of capital across the group as part of a wider consideration of the Company’s strategy.
Capital investment is regulated by the budgetary process, our automated authorisation for expenditure (‘AFE’) system and pre-defined
authorisation levels.
For expenditure beyond specified levels, detailed written proposals are submitted to the Board.
Using our AFE system Group capital expenditures are reviewed on a project-by-project basis by the Chief Financial Officer and
overruns, actual or foreseen, are investigated, and approved by the Board where appropriate.
Whistleblowing
The Board reviews the arrangements by which employees can raise any concerns they may have about workplace fraud or
mismanagement with local management on a confidential basis. Whistleblowing incidents are taken very seriously by the Board.
As part of the Board’s commitment to support our employees in the work place, we have a confidential process for reporting “Concerns
at Work”. This is a confidential service for reporting delicate matters that sometimes arise in the work place.
In addition, this service forms part of the Company’s commitment to comply with best practice under the UK Bribery Act. As disclosed
in our Anti-Bribery and Corruption policy which is available on the Company’s website, all individuals who work on behalf of the Group
have a responsibility to help detect, prevent and report instances not only of bribery but also of any other suspicious activity or
potential wrongdoing.
Employees are expected to make complaints to their line managers or, if this is not appropriate, through our independently managed
confidential reporting process, which is available to all employees as well as third parties.
Complaints made under the confidential reporting service are sent to the Head of Internal Audit and are investigated in the first
instance prior to a decision being taken about further steps. Feedback is provided to the person making the complaint, if necessary.
The Board is absolutely committed to ensuring that all employees have a safe, reliable, and confidential way of reporting any suspicious
activity.
Communication with shareholders
A key priority of the new Board that was appointed on or after 24th October 2017 is significant and rapid improvements in the
frequency and extent of communication with all shareholders. The new Board is committed to a more open relationship involving
regular communications in order that shareholders views on the Group can be better understood and addressed as appropriate.
A number of formal communication channels are used to account to shareholders for the performance of the Group, which include the
Annual Report, AGMs and periodic reports to the London Stock Exchange.
Presentations given at appropriate intervals to representatives of the investor community are available to all shareholders to
download from the Group’s website (www.jkx.co.uk). Less formal processes include contacts with institutional shareholders for which
the Board as a whole takes responsibility.
Extensive information about the Group’s activities is provided in the Annual Report and the Half-yearly Report. Enquiries from
individuals on matters relating to their shareholding and the business of the Group are welcomed and are dealt with in an informative
and timely manner. Shareholders are encouraged to attend the Annual General Meeting to discuss the progress of the Group.
Conflicts of Interest
The Company complies with the provisions on conflicts of interest in the Companies Act 2006.
The Company has procedures in place for the disclosure and review of any conflicts, or potential conflicts of interest which the
Directors may have and for the authorisation of such conflicting matters by the Board. In deciding whether to authorise a conflict or
potential conflict the Directors must have regard to their general duties under the Companies Act 2006. The procedure operates to
ensure the disclosure of conflicts, and for the consideration and if appropriate, the authorisation of them by non-conflicted Directors.
The authorisation of a conflict matter, and the terms of authorisation, may be reviewed at any time by the Board. The Nomination
Committee is mandated to support the Board in this process, being tasked to review requests from Directors for authorisations of
situations of actual or potential conflict and making recommendations to the Board and to review any situations of actual or potential
52
JKX Oil & Gas plc Annual Report 2017
GOVERNANCE
Corporate governance
conflict that have been previously authorised by the Board. The Committee may also make recommendations regarding
appropriateness of the authorisation.
Going concern
The Board closely monitors and manages the Group’s liquidity risk using cash flow forecasts which are regularly produced and applies
sensitivities for different scenarios including, but not limited to, changes in oil and gas prices, changes to production and other tax
rates in relation to the Group’s producing assets, changes in Rouble and Hryvnia exchange rates, increased operating and capital
expenditure and delays to additional future revenue. The Board also considers the current and future country and currency risks that
the business is exposed to.
At the date of this report, there are circumstances which result in the existence of a material uncertainty that may cast significant
doubt about the Group’s and Company’s ability to continue as a going concern. The circumstances giving rise to the material uncertainty
are discussed in Note 2 to the financial statements and relate to the potential for additional production related taxes becoming due for
payment in Ukraine. After making enquiries and considering the circumstances discussed in Note 2 to the financial statements, the
Directors have, at the time of approving the financial statements, a reasonable expectation that the Company and Group will have
adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis
of accounting in preparing the financial statements.
On behalf of the Board
Hans Jochum Horn
Chairman
27 April 2018
53
GOVERNANCE
Audit Committee Report
JKX Oil & Gas plc Annual Report 2017
Attendance and eligibility
Member
Committee member since
To
Hans Jochum Horn
Michael Bakunenko
October 2017
December 2017
Adrian Coates (as Chairman)
December 2017
Andrey Shtyrba (as Chairman)
October 17
present
present
present
present
Vladimir Rusinov1
April 2016/December 2017
June 17/present
Alan Bigman (as Chairman)
April 2016
Paul Ostling
Bernie Sucher
January 2016
April 2016
October 17
October 17
October 17
Number of meetings in 2017
Attendance/Eligibility
1/1
1/1
1/1
1/1
1/1
4/4
4/4
4/4
1. Vladimir Rusinov was appointed to the Committee on 1st April 2016, ceased to be a member on 30th June 2017 and was reappointed 8th December 2017.
The Audit Committee currently comprises 4 Non Executive Directors, two of whom are independent, and the Non Executive Chairman.
Audit Committee during 2017
Up until 30th June 2017 Alan Bigman, (as Chairman), Paul Ostling, Bernie Sucher and Vladimir Rusinov made up the Audit Committee.
Vladimir Rusinov was not reappointed to the Board at the Annual General Meeting held on 30th June 2017 and also ceased to be a
member of the Audit Committee on that date.
From 30th June 2017 until 24th October 2017 the Audit Committee consisted of Alan Bigman (as Chairman), Paul Ostling and Bernie
Sucher.
Following the resignation of Alan Bigman, Paul Ostling and Bernie Sucher on 24th October 2017 and the appointment of Andrey Shtyrba
as an independent Non Executive Director and Hans Jochum Horn as a Non Executive Chairman on the same day the Audit committee
consisted of Andrey Shtyrba (as Chairman) and Hans Jochum Horn until 8th December 2017.
On 8th December 2017 Michael Bakunenko, Vladimir Rusinov and Adrian Coates were appointed as Directors of the Company and
subsequently appointed to the Audit committee, with Adrian Coates appointed as Chairman on the same day.
The Audit Committee has carried out the requirements under the Disclosure and Transparency Rules 7.1.3R throughout the period that
this report covers. Paul Ostling, Alan Bigman, Russell Hoare, Adrian Coates and Hans Jochum Horn have relevant financial experience
as defined by the Code.
Role of the Audit Committee
The Audit Committee has delegated authority from the Board set out in its written terms of reference, available on the Company’s
website, which were last reviewed by the Board in July 2016. The principal objectives of the Audit Committee are:
to monitor the integrity of the financial statements of the Group and regulatory announcements, and to review any significant
financial reporting judgements;
to monitor the adequacy and effectiveness of the Group’s internal control, risk management and financial reporting processes;
to provide the Board with an independent assessment of the Group’s accounting affairs and financial position;
to provide the Board with assurance that the Annual Report and Accounts are presented in a manner that is fair, balanced and
understandable, so as to enable shareholders to assess the Group’s performance, business model and strategy;
to recommend the (re-)appointment of the external auditors to the Board and annually assess their independence, objectivity,
effectiveness, quality, remuneration and terms of engagement, as well as ensuring that the policy with regard to their
appointment for non-audit services is appropriately applied. Thereafter, the Committee provides a recommendation to the
Board regarding the auditors appointment to be put to the shareholders in the forthcoming annual general meeting; and
to monitor the adequacy and effectiveness of the internal audit function and the Risk Committee and to review any significant
matters arising.
Composition of the Audit Committee
Until 24th October 2017 the Audit Committee was chaired by Alan Bigman, an independent Non Executive Director. The Board
determined that Alan Bigman had recent and relevant financial experience gained through his previous and current roles.
The Committee also included Bernie Sucher, the other Independent Non Executive Director, Paul Ostling, the Non Executive Chairman,
and Vladimir Rusinov (until 30th June 2017), Non Executive Director.
54
GOVERNANCE
Audit Committee Report
JKX Oil & Gas plc Annual Report 2017
From 24th October 2017 until 8th December the Audit Committee was chaired by Andrey Shtyrba, an independent Non Executive
Director. The Committee also included Hans Jochum Horn, the Non Executive Chairman.
From 8th December until the year end the Audit Committee was chaired by Adrian Coates, an independent Non Executive Director. The
Committee also included Hans Jochum Horn, the Non Executive Chairman, Andrey Shtyrba, Independent Non Executive Director,
Michael Bakunenko, Non-executive Director and Vladimir Rusinov, Non Executive Director.
The Board determined that Andrey Shtyrba, Hans Jochum Horn and Adrian Coates had recent and relevant financial experience gained
through their previous and current roles and that for the purposes of the Disclosure and Transparency Rules Hans Jochum Horn is
independent applying the guidance set out in B.1.1 of the Code
The composition of the Audit Committee over the relevant period provided the Committee with an appropriate balance between those
individuals with a financial or accounting background and those with wider experience of the oil and gas sector and doing business in
regions in which JKX operates. In practice, the Committee achieves its objectives by a process of regular interaction with management
and the external auditors, as well as by reviewing the work of Internal Audit and other advisory firms.
Together with the collective financial and commercial skills and experience of the other Committee members, the Committee had the
appropriate experience to fulfil its responsibilities and oversee the activities of the Company’s auditors.
Attendance at meetings
The Audit Committee met five times during 2017 (2016: four).
The Committee’s meetings were attended when considered appropriate by the Chairman of the Committee by the (Acting) Chief
Executive, the Chief Financial Officer, the lead partner of our external auditors, and by certain senior managers who are responsible for
specific topics, such as risk management, financial control, and internal compliance procedures. Other Directors are invited to attend
the meetings from time to time when appropriate.
The Committee Chairman maintains contact with those other attendees throughout the year. Twice during 2017 (2016: twice), the
Committee Chairman met with the external auditors to discuss matters which the auditors and Audit Committee may wish to raise
without Executive Directors being present.
The Committee’s activities during 2017
As described on page 53 Alan Bigman, Paul Ostling and Bernie Sucher resigned on 24th October 2017. After that date there was no
member of the Committee who had been a member of the Committee immediately prior to that date. In view of this lack of continuity
the details set out in this section that relate to the period prior to 24th October are based solely on the minuted discussions of the
Committee.
During the period covered by this report, the Committee had an annual work plan, developed from its terms of reference, with standing
items that the Committee considered at each meeting in addition to any specific matters arising and topical items on which the
Committee has chosen to focus.
The work of the Audit Committee during the year principally fell under three main areas and is summarised below.
1st January – 24th October
Internal controls and risk
External auditors
Accounting, tax and financial reporting
Considered reports from the external
auditors on their assessment of the
control environment
Considered feedback from both the
Considered and approved the audit
Reviewed the half year and annual
approach and scope of the audit work
to be undertaken by the external
auditors and the fees for the same
financial statements and the
significant financial reporting
judgements made therein
internal and external auditor reports
as submitted by local and Group
management
Reviewed auditors’ reports on their
audit findings at the half year review
and at the year end
Reviewed risk reports, which required
management to identify risks and
evaluate them, and ensured
appropriate mitigating controls were
agreed and implemented
Approved the scope of the internal
audit programme for the year
Considered the effectiveness of the
internal audit function
Assessed the effectiveness of the
Group’s internal control environment
Reviewed and updated the policy
governing non-audit services
Considered the independence of the
auditors and their effectiveness,
taking into account:
(a) non-audit work undertaken by the
external auditors and compliance with
the policy;
(b) FRC guidance;
(c) feedback from a survey targeted at
various stakeholders; and
(d) the Committee’s own Assessment
Considered the liquidity risk and the
basis for preparing the Group half
yearly and full year financial
statements on a going concern basis
and reviewed the related disclosures in
the Annual Report
Reviewed the external auditors’ report
on audit and accounting judgements,
including consideration of relevant
accounting standards and underlying
assumptions
Reviewed disclosures in the Annual
Report in relation to internal controls,
risk management, principal risks and
uncertainties and the work of the
Committee
55
JKX Oil & Gas plc Annual Report 2017
Internal controls and risk
External auditors
Accounting, tax and financial reporting
Commissioned and received an
Considered and approved letters of
independent expert’s review of the
effectiveness of the Group’s Anti-
Bribery and Corruption policies,
systems and implementation and
reviewing an action plan to address
issues raised
representation issued to the external
auditors
Additionally Between 24th October - 31st December
Internal controls and risk
External auditors
Accounting, tax and financial reporting
Initiation of a group wide review of
Review of hydrocarbon reserves base
internal controls and their
implementation
and commissioning of further
assurance work.
Ongoing analysis of future cash flow
and liquidity and implementation of
monthly financial update reports
Review of impairment status of assets
Review of ongoing tax and other
and commissioning of further
assurance work.
Agreement of external auditors’
remuneration for the 2017 statutory
accounts
litigation
Implementation of enhanced interim
controls relating to cost, procurement
and payment
Review of the capex approval process,
including identification of additional
screening criteria (including risk,
payback period, cash flow impact,
return on investment, etc) to ensure
effective allocation of capital
Review of Anti-Bribery and
Corruption resourcing,
implementation and effectiveness and
response to the independent expert’s
review
Identification and management of
legacy issues, both documented and
undocumented
Review of resourcing available to the
Internal Audit function and its risk
based deployment
In the period from 24th October, and in particular in the period from 8th December when Michael Bakunenko, Vladimir Rusinov and
Adrian Coates were appointed as Directors of the Company and subsequently appointed to the Audit committee, the Committee has
focussed on introducing monitoring and control processes appropriate to the Company’s financial position. This work has continued in
the period from the end of 2017 until the date of the Annual Report and in particular the Audit Committee has additionally engaged
KPMG to review the appointment of legal advisers in the Ukraine, the manner in which payments to them were made and the nature of
such payments.
As recorded above, areas of particular focus since 24th October have included regular monitoring of the cash position, future cash flow
and liquidity, implementation of enhanced interim controls for procurement, cost and payment, overhaul of the capex approval process
by ensuring that appropriate screening criteria such as risk, payback period, cash flow impact, return on investment are considered and
that management are focussed on ongoing tax and other litigation and on anti-bribery and corruption.
56
GOVERNANCE
Audit Committee Report
JKX Oil & Gas plc Annual Report 2017
Significant issues considered by the Audit Committee
After discussion with management and the external auditors, the Committee determined that the key risk of misstatement in relation
to the Group’s 2017 financial statements related to:
The Group’s exposure to production-related taxes in Ukraine in respect of prior years and its impact on the going concern of the
Company;
The carrying value of the Group’s Oil and Gas assets.
Other significant issues considered, which were not directly related to risk of misstatement, were payments made to legal advisers in
Ukraine (discussed further on page 50) and the ability of the group to remain a going concern (discussed further on page 90).
These issues were discussed with management and the external auditors at the time the Committee reviewed and agreed the auditors’
Group Audit Plan, during the review of the half year interim financial statements in July 2017 and at the conclusion of the audit of
these financial statements.
57
JKX Oil & Gas plc Annual Report 2017
Matters considered
Response and conclusion
The Committee addressed this issue, as in previous periods, by
reviewing reports from senior management and examining the
degree to which these are supported by professional advice
from external legal and other advisory firms. This is also an
area of significant audit risk and accordingly the Committee
received detailed verbal and written reporting from
PricewaterhouseCoopers LLP (‘PwC’) on this matter.
In addition, PwC’s audit opinion provided includes an ‘emphasis
of matter’ paragraph referencing a specific risk relating to the
Company losing the 2010 and 2015 Claims after exhausting all
potential avenues of legal defence, and the Ukrainian
Government demanding immediate settlement, which
together represent a material uncertainty. Whilst it is
uncertain whether the Company will be successful in
defending it 2015 and 2010 Claims, if unsuccessful, and
immediate settlement is required, it may cast significant doubt
about the Group’s ability to meet its obligations as they fall due
and to continue as a going concern.
Having reviewed these reports and submissions, the
Committee was satisfied that a provision of $37.1 million
(2016: $33.9 million) (including interest and penalties) was
required in respect of production taxes being claimed for 2010
and 2015, and the tribunal award totalling $12.1 million was
disclosable as a contingent asset. Furthermore the Committee
noted that the disclosures made in Note 27 to the financial
statements appropriately reflected the uncertainties that
necessarily persist.
The Committee has advised the Board that, on the basis of
management’s reasonable expectations of a positive outcome
in defending the 2010 Claims and from settlement
negotiations with the Ukrainian Government in respect of the
2015 Claims and the arbitration award, the Group has
adequate resources to continue in operational existence for
the foreseeable future. Therefore, the going concern basis is
the appropriate basis of preparation for the 2017 financial
statements. However, the Committee has advised the Board
that this uncertainty represents a material uncertainty, which
should be, and is, appropriately disclosed in the financial
statements (see Note 27 to the Group financial statements).
The Group’s exposure to production-
related taxes in Ukraine and its impact on
going concern.
As detailed in Note 27 to the financial statements, JKX’s
Ukrainian operating subsidiary, Poltava Petroleum Company
(‘PPC’), has at times sought clarification of their status
regarding a number of production related taxes. PPC continues
to defend itself in the local courts against actions initiated by
the tax authorities regarding production related taxes for
August to December 2010 (‘2010 Claims’) and for January to
December 2015 (‘2015 Claims’). The 2015 Claims of
approximately $25.8 million (2016: $23.3 million) (including
interest and penalties) equate to the difference between the
55% official gas production tax rate in 2015 and the 28% rate
at which the PPC was entitled to pay in 2015 under an Interim
Award granted to PPC as part of, and until the conclusion of, the
international arbitration process.
In February 2017, the international arbitration tribunal
awarded the Company approximately $11.8 million plus
interest and costs of $0.3 million for damages pursuant to a
claim made against Ukraine under the Energy Charter Treaty to
recover $168 million in Rental Fees (plus damages) that PPC
has paid on production of oil and gas in Ukraine since 2011. In
March 2017, the Ukrainian government lodged an appeal
against the tribunal award in the High Court of the United
Kingdom. In October 2017, the High Court dismissed the appeal
and there are no further avenues of appeal for the Ukrainian
government. The Government of Ukraine is therefore still
liable to pay to JKX the sum of $11.8 million plus interest and
costs of $0.3 million in relation to subsidiary claims, as
previously ordered. While binding under international law, the
tribunal ruling still requires enforcement in the Ukrainian
courts. The potential inflow of economic benefits is disclosed as
a contingent asset in Note 27 of the financial statements.
Accordingly, the Group’s going concern assessment is sensitive
to the outcome of the Company’s production-related tax
disputes with the Ukrainian Government. Should the Company
lose the 2010 and 2015 Claims in the local courts and the
Ukrainian Authorities demand settlement, the Group does not
currently have sufficient cash resources to settle. This would
affect its ability to meet its obligations to creditors and
bondholders.
Under guidelines set out by the UK Financial Reporting Council
the Board is required to consider whether the going concern
basis is the appropriate basis of preparation for the Financial
Statements, and furthermore, is required to include
appropriate disclosure of any significant considerations or
uncertainties relevant to the going concern assumption.
58
GOVERNANCE
Audit Committee Report
JKX Oil & Gas plc Annual Report 2017
Matters considered
Response and conclusion
The carrying value of the Group’s oil and gas
assets
As explained in Note 5 to the financial statements, JKX’s oil and
gas assets are grouped into cash generating units (‘CGUs’) for
the purpose of assessing the recoverable amount. In each period
these assets are reviewed for indications of impairment. If any
assets are considered to have been impaired, the carrying value
is adjusted downwards by an appropriate amount, with a
corresponding charge made to the Income Statement.
An impairment review necessarily involves the use of
assumptions such as long-term production forecasts, gas prices,
production-related taxes, capital expenditure, discount rates,
and other macroeconomic assumptions underlying the
valuation process.
The Committee received reports from management outlining
the basis for each of the key assumptions used, and these
assumptions were reviewed and challenged by the Committee
to ensure reasonableness and consistency e.g. with the Group’s
2018 Budget which is approved by the Board. In addition, this
area is a prime source of audit focus and accordingly our
auditors provide detailed reporting to the Committee.
Management also brought to the attention of the Committee
the sensitivity analysis disclosed in Note 5 to the financial
statements.
The Committee agreed that, on the basis of the evidence
available, the projected future cash flows from the Group’s
CGUs adequately supported the carrying value of oil and gas
assets in Ukraine and Russia, and noted that full disclosure of
the key assumptions in respect of the CGUs (including
sensitivity analyses in Note 5) had been appropriately disclosed
in the financial statements.
The Committee also reviewed an impairment reversal in
respect of the Elizavetivske field. During 2014 the
Elyzavetivske field was impaired by $12.8m after significant
erosion of the headroom from 2013. The main driver of the
impairment was the reduction in reserves. Had this impairment
not been made, then the carrying value of Elyzavetivske would
have been $6.1m as at 31 December 2017. Therefore, a reversal
of $5.6m has been recognised.
In Hungary, management identified an impairment trigger and
a full impairment review was completed. The carrying amount
exceeded its recoverable amount by $2.8m and therefore the
assets were impaired to nil due to the reduction in the
estimated recoverable oil and gas volumes. Furthermore, the
absence of a firm work programme at year end to develop the
Hungarian exploration and evaluation assets, led to an
additional impairment of $0.8m.
In Slovakia, during 2017 there was no progress with the
exploration licences and at year end there were no further
exploration or evaluation planned or budgeted. On 16 March
2018 the Company gave a formal notice of relinquishment of
Svidnik, Medzilaborce and Snina exploration licences to the
other parties in the joint venture. The assets were impaired in
full by $7.9m.
Misstatements
Management reported to the Committee that they were not aware of any material or immaterial misstatements made intentionally to
achieve a particular presentation. The auditors reported the misstatements that they had found in the course of their work to the
Committee and confirmed that no material amount remained unadjusted.
Internal control
The Audit Committee monitors the integrity of the financial statements and related announcements, reviews the Company’s internal
control processes and risk management systems, and reports its conclusions to the Board. The Committee regularly reviews the
effectiveness of the Company’s systems of internal control and risk management.
59
JKX Oil & Gas plc Annual Report 2017
Risk management
The Risk Committee, which comprises senior management and functional experts, assists the Board in discharging their responsibility
to review on an ongoing basis the risks potentially facing the Group, their potential impact, the strategies available to mitigate those
risks and the costs of such mitigation. Following the resignation of the executive directors in 2017 the membership of the Risk
committee is in the process of being reviewed to ensure it remains fit for purpose.
The Risk Committee met once in 2017 (2016: three).
The Chairman of the Risk Committee reports to the Audit Committee and the Board at relevant meetings on matters it has reviewed
and material changes to the Group’s risk environment, in addition to making recommendations when appropriate.
Following each Risk Committee meeting, the Committee reviews the minutes, the latest Risk Register and related output, and
challenges the Group’s high-rated risks and the mitigating actions identified by each risk owner. An updated list of principal risks is
included within the Strategic Report on pages 34 to 39.
For each high-rated risk the Committee reviews the Group’s current level of exposure and considers the appropriateness of the
mitigating actions being taken by management.
The Committee was comfortable with the processes in place for risk management.
Additional information on risk management is included in the ‘Principal risks and how we manage them’ section on pages 32 to 33.
The Audit Committee will review the latest Risk Register and related output, and challenge the Group’s high-rated risks and the
mitigating actions identified by each risk owner. An updated list of principal risks is included within the Strategic Report on pages 34
to 39.
Internal audit
During the year the Board appointed an internal audit manager with direct access to the Chairman of the Audit Committee who
undertook a number of significant pieces of work including:
Assessment of the effectiveness of key aspects of the procurement process implemented in PPC, the Ukrainian subsidiary of JKX,
including a full scope review of purchase-to-pay procedures and controls that included testing of design and operating effectiveness
of controls across the entire process.
Regular monitoring of the implementation of procurement process improvements recommended by KPMG in prior years for YGE, the
Russian subsidiary of JKX. The full-scope audit of procurement process in Russia is planned for 2018.
Reviewing PPC’s last asset stock taking process and its results, performing a root cause analysis of the identified issues and
recommending improvements to both the inventory management process and stock taking procedures.
Following the abandonment of the fracturing program at PPC, Internal Audit actively participated in the PPC review of the decision
making process that led to the fracturing methodology adopted and well-candidate selection and provided its independent view of
the learnings which will be applied to the design of the PPC Field Development Program.
Following prior year reviews of HR and Payroll processes, Internal Audit, together with KPMG, reviewed PPC’s compliance with local
payroll legislation. This required the recalculation of all payroll cycles for a 1 year period, investigation of identified differences and
the preparation and implementation of a mitigation plan.
The Audit Committee remains fully supportive of the development of the internal audit programme which is intended to ensure that
the necessary processes and controls are firmly embedded within our organisation making the control environment stronger and more
efficient.
External audit
The Audit Committee maintains an objective and professional relationship with the Company’s auditors, PricewaterhouseCoopers LLP
(‘PwC’), who have been auditors to the Group since 2006, and meets in private session with them on a periodic basis.
PwC were reappointed as the Company’s auditors in 2011 following a competitive tender process. The audit partner rotated in 2013 and
in 2016. PwC are required to rotate the audit partner responsible for the Group audit every five years.
The Audit Committee are fully supportive of the Code’s requirement that the audit should be put out to tender at least once in every ten
years. Any decision to open the external audit to tender within ten years is taken on the recommendation of the Audit Committee based
on the results of the annual performance review.
Non-audit services
During the year the Committee reviewed their policy governing the engagement of the external auditor to provide non-audit services.
The policy precludes PwC from providing certain services such as valuation work or the provision of accounting services and also sets a
presumption that the external auditor should only be engaged for non-audit services where there is no legal or practical alternative
supplier.
In such instances, the continued objectivity and independence of the auditors in their capacity of auditor is an objective of the Group.
60
GOVERNANCE
Audit Committee Report
JKX Oil & Gas plc Annual Report 2017
The Committee approves all non-audit services from PwC. In addition to the statutory audit fee, PwC and member firms charged the
Group US$38,625 for audit-related assurance services in 2017 in connection with the design of a new Board remuneration structure
and policy and $2,000 for the use of PwC’s online technical information database.
Further details of the fees paid, for both audit and non-audit services, can be found in Note 23 to the consolidated financial statements.
The Committee is satisfied that the quantum of the non-audit services provided by PwC is such that the objectivity and independence of
the external auditor has not been compromised.
Adrian Coates
Chairman of the Audit Committee
27 April 2018
61
GOVERNANCE
Directors’ Remuneration Report
JKX Oil & Gas plc Annual Report 2017
Independence
Prior to 24 October 2017 the Remuneration Committee comprised three independent Non-Executive Directors. On 24 October 2017
Paul Ostling, Alan Bigman and Bernie Sucher left the Board with immediate effect. The resignation of all independent Non-Executive
Directors meant that, from that date, the composition of the Board did not comply with the UK Corporate Governance Code (‘the Code’)
in respect of the number of independent Non-Executive Directors. Without independent Non-Executive Directors, the Company was
not able to form a Remuneration Committee compliant with the Code.
On the same day Hans Jochum Horn and Andrey Shtyrba were appointed to the Board as independent Non-Executive Directors with
immediate effect.
On 8 December 2017 Adrian Coates, Michael Bakunenko and Vladimir Rusinov joined the Board as Non-Executive Directors of the
Company. On 11 December 2017, a Remuneration Committee was formed with Mr. Shtyrba appointed as Chairman and Hans Jochum
Horn and Vladimir Tatarchuk as members. On 9 February 2018 Christian Bukovics joined the Company as an independent Non-
Executive Director, he was also appointed to the Committee as a member.
Since Mr. Shtyrba has only recently became a Chairman of the Remuneration Committee, he is not in the position to comment with
regards to the Directors’ remuneration decisions made during 2017 and in particular prior to his appointment. Please note, there were
no changes relating to Directors’ remuneration made during the year.
Remuneration in 2017
Details of the remuneration decisions for the reporting year are covered in the Annual Report on Remuneration.
The Committee annually examines the evolution of remuneration practices and policy. Changes proposed by the Committee at the AGM
in June 2014 were approved and were to remain in place for three years from 1 January 2015 to 31 December 2017.
Non-Executive Directors’ fees for 2017 remained on the same level as in 2016.
Under the Performance Share Plan (‘PSP’) approved at the 2014 AGM, awards would normally be granted of nil cost options which
equate to 150% of the base salary for each of the Executive Directors. For 2017, the Committee chose not to grant any awards to
Executive Directors under the PSP pending submission of a new share plan for Directors to shareholders for approval at the 2017 AGM.
The new share plan for Directors was not approved by shareholders at the 2017 AGM.
Remuneration in 2018
The Directors’ Remuneration Policy revised during 2016-2017 was not approved by shareholders at the Company’s 2017 Annual
General Meeting (see page 72). Details of the proposed Future Policy were provided in the Notice of Annual General Meeting 2017.
Therefore, the Directors’ Remuneration Policy, together with the changes proposed by the Committee, approved by shareholders at the
AGM in June 2014 will remain in place.
Remuneration disclosure
This Report is split into two parts: the Directors’ Remuneration Policy and the Directors’ annual remuneration report:
The Directors’ Remuneration Policy applicable during 2017 (pages 61 to 65) was unchanged from that approved by shareholders at
the June 2014 AGM, and have therefore provided a summary in order to provide context.
The Annual Report on Directors’ Remuneration (pages 66 to 73) sets out details of how our remuneration policy has been applied
for the year ended 31 December 2017. This section is subject to an advisory shareholder vote.
These sections work together to give you full and transparent disclosure of the Company’s approach to Directors’ remuneration during
2017.
Summary of Directors’ Remuneration Policy
The Remuneration Policy for Executive Directors and Non-Executive Directors was approved by shareholders at the June 2014 AGM
and took effect from 1 January 2015. Below we provide a summary including the Remuneration policy table, and terms and conditions
for members of the Board. The full policy report, as approved by shareholders, can be found on pages 125-133 of the 2013 Annual
Report, a copy of which can be found on the Company’s website at http://www.jkx.co.uk/investor-centre/investor-download-
centre.aspx.
Reward policies
The Company aimed to ensure that total remuneration was set at an appropriate level relative to peer group comparator companies,
those being UK-based oil and gas companies which are primarily quoted on the London Stock Exchange or AIM. The main components
of remuneration for Executive Directors and senior management are basic annual salary; pension and benefits (including non-
contributory health insurance, life assurance and income protection); an annual bonus scheme linked to short-term financial and
strategic objectives; and long-term incentives linked to the delivery of long-term shareholder value.
Following results of the AGM on 30 June 2017 at which Thomas Reed, Russell Hoare, and Vladimir Rusinov were removed as Directors
of the Company, the Board was actively looking for new Executive and Non-Executive Directors. Victor Gladun and Dmitriy Poddubny,
62
GOVERNANCE
Directors’ Remuneration Report
JKX Oil & Gas plc Annual Report 2017
the General Director and the Finance Director of Ukrainian operating subsidiary, had taken on the role of Acting CEO and Acting CFO.
On 20 November 2017 Ben Fraser joined the Company as CFO with immediate effect.
At present, neither the Acting CEO nor CFO have been appointed to the Board as Directors. Thus, their remuneration is not included in
this report.
Remuneration to Executive Directors removed from the Board on 30 June 2017 was paid in accordance with the Remuneration policy
provided below.
Reward principles
The principles of JKX’s remuneration policy are to:
pay an appropriate level of total remuneration in relation to company and individual performance and with reference to peer group
companies in order to attract, retain and motivate individuals with the appropriate skills and capabilities;
ensure that there is an appropriate link between performance and reward; and
award annual bonuses which reflect the achievement of short term financial and strategic objectives as well as personal
performance.
Each element of remuneration has a specific role in achieving the objectives of the remuneration policy and aligning the interests of
Executive Directors with the interests of shareholders. The combined potential remuneration from the annual bonus and long-term
incentives ensures that the balance of the Executive remuneration package is weighted towards at risk performance pay with a higher
weighting on long-term remuneration.
More than 97% of JKX staff are based outside of the UK, primarily in the Ukraine and Russia. The Committee takes into account
remuneration conditions elsewhere in the Company, and particularly for those employees based in the UK, in formulating the
Executive Director remuneration policy.
A summary of the Directors’ remuneration policy applicable during 2017 is provided in the table below.
Executive Director Remuneration Policy Table
Base salary
Purpose and link to strategy
Operation
To attract and retain talent by ensuring base salaries reflect individual performance and
market factors.
Base salaries were reviewed annually, with reference to the individual’s role, experience and
performance; salary levels at relevant UK sector comparators1, and the range of salary
increases applied across the Group.
Opportunity
Any base salary increases were applied in line with the outcome of the annual review.
Performance metrics
Business and individual performance were considerations in setting base salary.
Pension
Purpose and link to strategy
To provide competitive retirement benefits.
Operation
The Company made a contribution to the pension scheme of the individual’s choice.
Opportunity
At their option, UK-based Executive Directors could have either had equivalent contributions
made to their personal pension schemes or cash in lieu of pension or a combination of both.
UK-based Executive Directors were eligible to receive an annual contribution equivalent to
15% of base salary.
Performance metrics
Not performance related.
Benefits
Purpose and link to strategy
To provide competitive benefits.
Operation
Executive Directors received benefits which consisted primarily of life assurance, income
protection and private medical cover, although could have included any such benefits that the
Committee deemed appropriate.
1 Comparator companies used to assess market pay competitiveness have historically included UK-based oil and gas companies listed on the London Stock Exchange or AIM. The
Committee reviewed comparator companies periodically to ensure they remain appropriate and retains the discretion to adjust the reference group or companies as appropriate.
63
JKX Oil & Gas plc Annual Report 2017
Opportunity
Benefits values varied by role and were reviewed periodically relative to market
circumstances.
The cost of the benefits provided changed in accordance with market conditions and would,
therefore, determined the maximum amount that would have been paid in the form of
benefits during the Policy Period. The Committee retained the discretion to approve a higher
cost in exceptional circumstances (e.g. relocation) or in circumstances where factors outside
the company’s control had changed materially (e.g. increases in insurance premiums).
Not performance related.
Performance metrics
Annual bonus
Purpose and link to strategy
To incentivise the achievement of short-term financial and strategic objectives.
Operation
Performance measures, targets and weightings were set at the start of the year according to
strategic priorities.
Opportunity
Performance metrics
At the end of the year, the Remuneration Committee determined the extent to which the
targets had been achieved, with any bonus payments delivered in cash.
For Executive Directors, the Committee had the discretion to mandate the deferral of a
proportion (up to 100%) of the annual bonus in JKX shares, to be held for a minimum of 1 year.
Deferred shares were subject to clawback provisions in the event of gross misconduct,
material misstatement, or in any other circumstance that the Committee considered
appropriate.
For Executive Directors, the maximum annual bonus opportunity was 100% of base salary,
with target bonus set at 40% of maximum. For threshold level performance, the annual bonus
would be between 0% to 20% of base salary.
Performance was assessed annually based on challenging and stretch targets for operational,
organisational, financial and health and safety performance. The measures selected could
vary each year depending on business context and strategy, and measures would be weighted
appropriately according to business priorities. Under normal circumstances, financial
measures would make up at least half of the total bonus opportunity.
The Committee had discretion to adjust the formulaic bonus outcomes both upwards and
downwards within the plan limits (including down to zero) to ensure alignment of pay with the
underlying performance of the business, e.g., in the event of a target being significantly missed
or unforeseen circumstances outside of management control.
64
GOVERNANCE
Directors’ Remuneration Report
JKX Oil & Gas plc Annual Report 2017
Performance Share Plan (‘PSP’) (There were no options granted to Directors under the PSP during 2017. The future policy proposed at the
2017 AGM did not envisage the grant of any awards under the PSP and was not approved by the shareholders)
Purpose and link to strategy
To incentivise strong long-term financial performance and superior longer term returns to
shareholders relative to peers.
Operation
Opportunity
Performance metrics
The Remuneration Committee had the ability to grant awards of nil-cost options annually to
Executive Directors, conditional on Group performance over a period of at least three years.
The sale of vested PSP awards was subject to meeting shareholding requirements
(see page 73).
The PSP provided for an award up to a normal aggregate limit of 150% of salary for Executive
Directors, with an overall limit of 200% of salary in exceptional circumstances.
Vesting of PSP awards was subject to continued employment and the Company’s performance
over a 3-year performance period. If no entitlement had been earned at the end of the
relevant performance period, awards would lapse.
From 2015, PSP awards were based on a number of financial and strategic measures, which
could include, but were not be limited to:
TSR
Earnings per share (‘EPS’)
Other financial measures (e.g. ROCE, Profit before tax, cash resources)
Strategic and operational measures (e.g. production, reserves)
In addition, awards were subject to an underpin such that for any awards to vest, the
Remuneration Committee must have satisfied themselves that health and safety
performance was satisfactory over the performance period. Each measure could have been
applied a weighting of between 0% and 50%. The Committee had the discretion to adjust the
performance measures and weightings in advance of making an award to ensure that they
continued to be linked to the delivery of Company strategy.
Under each measure, threshold performance would result in up to 25% of maximum vesting
for that element. The vesting level would increase on a sliding scale to 100% vesting for
stretch levels of performance.
Vesting of PSP awards would be deferred in whole or in part for a period of up to two years
following the end of a three year vesting period. The Company’s policy from 2015 was for
awards to vest 50% after 3 years with 25% required to be held until the end of 4 years, and
25% until the end of 5 years.
As under the annual bonus, the Committee had discretion to adjust the formulaic PSP
outcomes within the plan limits to ensure alignment of pay with performance, i.e. to ensure
the outcome was a true reflection of the performance of the company.
65
JKX Oil & Gas plc Annual Report 2017
Non-Executive Director fees
Function
Operation
Opportunity
To attract and retain Non-Executive Directors of the highest calibre with broad commercial
and other experience relevant to the Company.
Fee levels are reviewed annually, with any adjustments effective 1 January in the year
following review. The fees paid to the Chairman and Non-Executive Directors are determined
by the Board.
Additional fees are payable for acting as Senior Independent Director and as Chairman of the
Audit and Remuneration Committees, and for individual membership of such Committees.
Fee levels are benchmarked against comparable companies in the sector as well as FTSE-
listed companies of similar size and complexity. Time commitment and responsibility are
taken into account when reviewing fee levels.
Non-Executive Director fee increases are applied in line with the outcome of the annual fee
review. Fees for the year commencing 1 January 2017 are set out in the Annual Report on
Remuneration.
Fee levels will be next reviewed during 2018, with any increase effective 1 January 2019. It is
expected that increases to Non-Executive Director fee levels will be in line with salaried UK-
based employees over the life of the policy. In the event that there is a material misalignment
with the market or a change in the complexity, responsibility or time commitment required to
fulfil a non-executive role, the Board has discretion to make an appropriate adjustment to the
fee level.
Performance metrics
None
Executive Director Service Contracts
Executive Director service contracts, including arrangements for early termination, are considered by the Committee. The Committee
considered appointments with a notice period of one year to be appropriate. All service contracts and letters of appointment are
available for viewing at the Company’s registered office and at the AGM.
Thomas Reed
Russell Hoare
Date of contract
28 January 2016
28 January 2016
Notice period1
12 months
12 months
Date of termination
30 June 2017
30 June 2017
1. The notice period is 12 months by the Company or the individual
Executive Director Service Contract severance payments
Following results of the AGM on 30 June 2017, two Executive Directors, Tom Reed and Russell Hoare had been removed from the Board
of Directors. The Board agreed on a three months transition period. During this period, Tom Reed and Russell Hoare were to remain as
an advisor to the Acting CEO and Acting CFO respectively and continued to be remunerated on the basis of their previous contractual
arrangements with the Company. The termination of the contracts had been brought forward and took effect from 12 midnight on 31
July 2017. The following amounts were approved at the Committee meeting on 27 July 2017:
payments “in lieu of notice” totalling $1,100,000 equivalent to 12 months’ salary for Tom Reed and Russell Hoare;
pro-rated bonus payments totalling $170,000;
payments of 20% benefits differential totalling $220,000;
deductions relating to overpayment of 2016 bonus, totalling $126,000 were subtracted from the total.
Payments totalling $1,364,000 were paid in two tranches, 40% of the total was paid on 25 August 2017, with the remaining 60% on 27
September 2017. The amounts relating to the payments in lieu of notice, pro-rated bonus payments and benefits differential are
included in “Payments for loss of office” section in the Annual Report on Directors’ Remuneration for 2017 (see page 68).
Payments from existing awards
Executive Directors were not eligible to receive payment from any awards.
66
GOVERNANCE
Directors’ Remuneration Report
JKX Oil & Gas plc Annual Report 2017
The following section provides details of how JKX’s remuneration policy was implemented during the financial year ended 31
December 2017. In accordance with the Committee’s terms of reference and the Group’s remuneration policy, the Committee
determines Executive Directors’ actual remuneration for the year.
Membership and process
Members
From
To
Andrey Shtyrba (Chairman) 11 December 2017
present
Hans Jochum Horn
11 December 2017
present
Vladimir Tatarchuk
1 April 2016
present
Bernie Sucher (Chairman)
1 April 2016
24 October 2017
Alan Bigman
Paul Ostling
1 April 2016
24 October 2017
1 April 2016
24 October 2017
Number of meetings
in 2017 -
Attendance/Eligibility
1/1
1/1
2/3
2/2
2/2
2/2
The Committee meets at least twice a year, to assist the Board in determining the remuneration arrangements and contracts of the
Directors and senior employees. The Committee met three times during 2017 (2016: three times).
The Remuneration Committee had reviewed the Code, specifically Section D that addresses the level, make up and procedural aspects
of remuneration. The Remuneration Committee considered that it complied with all the provisions and practices identified.
Attendance at meetings
When required, the Chief Executive attends Committee meetings; however no Director plays a part in any discussion regarding his own
remuneration other than to be challenged on bonus targets and the degree to which they have been met.
During 2017, none of the Committee members had any personal financial interest and no conflicts of interests arise from cross-
directorships or day-to-day involvement in running the Group.
Members from 1 April 2016
Role of the Committee
Activities during 2017
Andrey Shtyrba (as Chairman) - appointed
11 December 2017
Hans Jochum Horn - appointed
11 December 2017
Vladimir Tatarchuk
Bernie Sucher (as Chairman) - resigned 24
October 2017
Alan Bigman - resigned 24 October 2017
Paul Ostling - resigned 24 October 2017
Establishes the overall principles of
remuneration for Directors of all Group
companies
In addition to regular topics, the
Committee engaged in specific matters
including:
Determines the remuneration of Executive
Directors and Senior Management,
communicates this to the stakeholders in
the annual report
Recommends the participation in, and
operation of, the Company’s long-term
incentive plans.
The full terms of reference are available
from the Company’s website
Approval of executive salary levels for
2017
Review and approval of performance
targets for the 2017 Annual Bonus
Scheme
Drafting of an alternative long-term
incentive share plan to be presented to
shareholders at the 2017 AGM; and
Review the application and
appropriateness of current
remuneration policies.
Given the greater focus that shareholders now apply to the remuneration policies of pubic company boards, the Company believes it
appropriate to include one of the non-executive shareholder representative directors on the Remuneration Committee, while also
recognising the need for the remainder of the Committee to be independent directors in order to maintain corporate governance
standards.
Single figure of total remuneration for Executive Directors (audited)
The table below sets out a single figure for the total remuneration received by each Director for the year ended 31 December 2017 and
the prior year. Through 2017 and 2016, contract for Tom Reed was stated and settled US Dollars and contract for Russell Hoare was
stated in US Dollars and settled in its Sterling equivalent. Figures in this report are disclosed in (the Group’s reporting currency).
67
JKX Oil & Gas plc Annual Report 2017
The level of base salaries have remained unchanged for both 2016 and 2017.
$’000
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
Salary2
Benefits3
Annual Bonus4
Pension5
Total
Executive Directors - removed
30 June 2017
Tom Reed1
Russell Hoare1
325
225
550
599
415
1,014
-
4
4
28
8
36
-
-
-
634
506
1,140
-
34
34
-
62
62
325
263
588
1,261
991
2,252
1. Appointed 28 January 2016, removed from the Board of Directors 30 June 2017. Figures exclude bonus and benefit differential agreed and paid as part of severance package to
two Executive Directors removed 30 June 2017. Please refer to ‘Payments for loss of office’ section on page 68.
2. Salary: amount earned for the year
3. Benefits: the taxable value of benefits received in the year, including life assurance, income protection and private medical cover
4. Annual Bonus: this is the total cash bonus earned based on performance during 2017 and 2016
5. Pension: annual contribution by the Group to directors’ pension plans or cash in lieu
Single total figure of remuneration for Non-Executive Directors (audited)
The table below sets out a single figure for the total remuneration received by each Director for the year ended 31 December 2017 and
the prior year.
All Directors' remuneration was rebased to US Dollars from 28 January 2016 (the Group’s reporting currency). Through 2017, contracts
for Paul Ostling and Adrian Coates were settled in its Sterling equivalent.
$’000
2017
2016
2017
2016
Fees
Total remuneration
Non-Executive Directors
Hans Jochum Horn1
Andrey Shtyrba1
Adrian Coates2
Michael Bakunenko2
Vladimir Tatarchuk5
Vladimir Rusinov6
Former Non-Executive Directors
Paul Ostling3
Alan Bigman4
Bernie Sucher4
50
25
10
1
8
4
216
116
116
546
-
-
-
-
6
6
246
107
107
472
50
25
10
1
8
4
216
116
116
546
-
-
-
-
6
6
246
107
107
472
1. Appointed 24 October 2017, appointed to Board Committees 11 December 2017
2. Appointed 8 December 2017, appointed to Board Committees 11 December 2017
3. Appointed 28 January 2016, resigned 24 October 2017
4. Appointed 1 April 2016; resigned and reappointed 28 June 2016. Resigned 24 October 2017
5. Appointed 28 January 2016; appointed to Board Committees 1 April 2016.
6. Appointed 28 January 2016; appointed to Board Committees 1 April 2016. Removed from the Board of Directors 30 June 2017 and reappointed 8 December 2017.
Incentive outcomes for the year ended 31 December 2017 (audited)
Annual Bonus Scheme
The Annual Bonus Scheme for 2017 applied to Executive Directors and certain senior management including senior staff in Poltava
Petroleum Company (‘PPC’). The scheme is discretionary and annual awards are not pensionable.
Bonuses to two Executive Directors removed 30 June 2017 were part of severance package approved by Remuneration Committee
(please refer to ‘Payments for loss of office’ section on page 68). They were based on a similar performance framework as in 2016 using
a range of strategic, financial and organisational targets.
Scheme interests awarded in 2017 (audited)
The Company only operated one long-term incentive plan during 2017 that being the 2010 Performance Share Plan (‘PSP’) which was
approved by shareholders at the 2010 and 2014 Annual General Meetings. There were no grants to Directors under the PSP during
2017. An alternative long-term incentive plan in the Revised Remuneration Policy submitted to Shareholders at the 2017 AGM had not
been approved by the Shareholders. The PSP will continue to be used to award options to other executives within the business.
The PSP provides nil-cost options for Executive Directors and senior management.
68
GOVERNANCE
Directors’ Remuneration Report
JKX Oil & Gas plc Annual Report 2017
In any ten year period, the number of Shares which may be placed under Option, or issued:
may not exceed five per cent of the Company’s ordinary share capital if issued under the discretionary employees’ share scheme; and
may not exceed ten per cent of the Company’s ordinary share capital if issued under the other employees’ share schemes.
As at 31 December 2017, the maximum available shares under the Company’s 5% and 10% limits was 7.5 million (2016: 7.2 million) and
16.1 million (2016: 15.8 million) shares respectively, out of an issued share capital of 172.1 million shares.
Payments for loss of office (audited)
Executive Director Service Contract severance payments
The table below sets out the treatment in relation to Executive Directors who left the business during the year. Following results of the
AGM on 30 June 2017 two Executive Directors, Tom Reed and Russell Hoare had been removed from the Board. The Board agreed on a
three months transition period. During this period, Tom Reed and Russell Hoare were to remain as an advisor to the Acting CEO and
Acting CFO respectively and continued to be remunerated on the basis of their previous contractual arrangements with the Company.
The termination of the contracts had been brought forward and took effect from 12 midnight on 31 July 2017. The following amounts
were approved at the Committee meeting on 27 July 2017:
payments “in lieu of notice” totalling $1,100,000 equivalent to 12 months’ salary for Tom Reed and Russell Hoare;
pro-rated bonus payments totalling $170,000;
payments of 20% benefits differential totalling $220,000;
deductions relating to overpayment of 2016 bonus, totalling $126,000 were subtracted from the total.
Payments totalling $1,364,000 were paid in two tranches, 40% of the total was paid on 25th August 2017, with the remaining 60% on
27th September 2017.
$’000
Executive Directors – removed
30 June 2017
Tom Reed
Russell Hoare
Payment in
lieu of notice
20% benefits
differential
Pro-rated
bonus
Deductions for
2016 bonus
Total
650
450
1,100
130
90
220
70
100
170
(35)
(91)
(126)
815
549
1,364
Non-Executive Director – Exit payments
On 31 July 2017, three independent non-executive directors, Paul Ostling, Alan Bigman and Bernie Sucher, have each tendered their
resignations from the Board and their three months' notice was complete on 24 October 2017. No additional payments were agreed.
Executive Director remuneration for 2017
Base salary
An Executive Director’s basic salary and the other fixed elements of pay were determined by the Committee at the beginning of the
year. The individual salaries and benefits of Executive Directors were reviewed taking into account individual performance and
market factors, with reference to independent and objective research that provides up-to-date information on a comparator group of
UK companies operating in the independent oil and gas sector.
In recognition of the financial circumstances facing the Company, the Committee did not increase basic salaries with effect from 1
January 2017:
Tom Reed
Russell Hoare
2016 Salary
2017 Salary1
% increase
$650,000
$325,000
$450,000
$225,000
nil
nil
1. The level of base salary for the CEO and CFO has remained unchanged for both 2016 and 2017. The difference shown above is due to the removal of both Executive Directors
from the Board on 30 June 2017.
The average salary increase awarded in the middle of the year pay review for UK employees was 4.0% (2016: nil).
Pension and benefits
The Company provided a contribution equivalent to 15% of basic salary to the pension scheme of the individual’s choice for any UK-
based Executive Directors.
At their option, Executive Directors could either have contributions of the same amounts made to their personal pension schemes or
cash in lieu of pension at the stated rate, or a combination of pension contributions and cash in lieu at the stated rate, subject to normal
statutory deductions.
69
JKX Oil & Gas plc Annual Report 2017
Benefits provided to Executive Directors includes life assurance, which is also provided for senior managers, for a sum assured of four
times base salary; income protection (¾ base salary deferred for 13 weeks); and private medical cover (AXA PPP) is offered to all
Company employees and provides medical cover for them and their dependents, on a non-contributory basis).
Non-Executive Director remuneration
The following Non-Executive Service Contracts were in place during the year:
Non-Executive
Date of contract
Term of contract
Notice period
Date of termination
Hans Jochum Horn
24 October 2017
Andrey Shtyrba
24 October 2017
Adrian Coates
8 December 2017
Michael Bakunenko
8 December 2017
Vladimir Tatarchuk
28 January 2016
Vladimir Rusinov
Paul Ostling
Alan Bigman
Bernie Sucher
28 January 2016
removed 30 June 2017,
reappointed
8 December 2017
28 January 2016
1 April 2016
1 April 2016
3 years
3 years
3 years
3 years
3 years
3 years
3 years
3 years
3 years
3 months
3 months
3 months
3 months
3 months
3 months
3 months
3 months
3 months
N/A
N/A
N/A
N/A
N/A
30 June 2017, reappointed
8 December 2017
24 October 2017
24 October 2017
24 October 2017
All Non-Executive Directors’ service contracts were put in place for an initial term of three years, a finite term, as recommended by
Section B.2.3 of the Code. In the event of early termination, the Non-Executive Directors’ contracts provided for compensation of three
months base fee.
The Non-Executive Directors are paid a base fee for carrying out their duties and responsibilities as Directors, and fees for membership
and, where applicable, chairmanship of each of the remuneration, nomination and audit committees.
The fees were last increased by 5% at the end of 2013 and based on a per annum rate (in Sterling) which was compared to published
material concerning Non-Executive Director fees in similar size companies and comparable companies in the sector.
All Non-Executive Directors’ remuneration was stated and paid in Sterling until 27 January 2016. From 28 January 2016, all Directors'
remuneration was rebased to US Dollars (the Group’s reporting currency).
These fees were reviewed at the 2017 year end and no increase has been awarded from their 2017 level. Non-Executive Directors’ fees
for 2017 and 2018 are as follows:
2017
2018
% increase from
2017 to 2018
Chairman of the Company
$250,000
$250,000
Board membership fee
$120,000
$120,000
Senior Independent Director
Committee chairman - Audit
Committee chairman - Remuneration
Committee chairman - Nomination
Committee membership – Audit
Committee membership – Remuneration
Committee membership – Nomination
$15,000
$15,000
$15,000
$15,000
$7,500
$7,500
$7,500
$15,000
$15,000
$15,000
$15,000
$7,500
$7,500
$7,500
nil
nil
nil
nil
nil
nil
nil
nil
nil
Non-Executive Directors cannot participate in any of the Company’s share schemes nor are they eligible to join the Company’s pension
benefit arrangements.
Payments to past Directors (audited)
No payments were made to past directors in the year.
Percentage change in CEO remuneration
The table below shows the percentage change in CEO remuneration from the prior year compared to the average percentage change in
remuneration for UK employees.
70
GOVERNANCE
Directors’ Remuneration Report
JKX Oil & Gas plc Annual Report 2017
The CEO’s remuneration includes base salary, taxable benefits and annual bonus. The analysis excludes part-time employees and is
based on a consistent set of all UK employees, i.e. the same individuals appear in the 2016 and 2017 populations. A comparison with UK
employees is used as most of the Group’s senior management are based in the UK; all other Group staff are employed in Ukraine and
Russia which have different economies from the UK driving their remuneration levels and practices.
Base salary
Taxable benefits
Annual bonus
Total
2017
$’000
325
-
-
325
CEO
All UK employees
2016
$’000
652
29
6341
1,315
% change
2016 - 17
(50)%
(100)%
(100)%1
(75)%
% change
2016 - 17
4%
(100)%
(100)%1
(65)%
1. The calculations are based on the cash amount of the 2016 and 2017 bonuses paid during January and February 2017.
The level of base salary for the CEO has remained unchanged for both 2016 and 2017. The difference shown above is a result of the
removal of Thomas Reed as Director from the Board of the Company following results of the AGM on 30 June 2017.
Relative importance of spend on pay
The table below show shareholder distributions (i.e. dividends and share buybacks) and total employee pay expenditure for the
financial years ended 31 December 2016 and 31 December 2017, along with the percentage change in both.
All-employee remuneration
Distributions to shareholders
Review of past performance
2017
$’000
14,104
–
2016
Year-on-year
$’000
17,226
–
change
(18)%
–
The following graphs show the Company’s TSR performance compared to the performance of the FTSE All-Share and FTSE All-Share Oil
& Gas Producers Index indices over a 9-year and 11-year period. These indices have been chosen as suitable broad comparators against
which the Company’s shareholders may judge their relative returns given that the Company is a member of the FTSE All-Share and
continue to be part of the FTSE All-Share Oil & Gas Producers Index.
JKX vs FTSE All-Share Index and FTSE All-Share Oil & Gas Producers Index
225.0
200.0
175.0
150.0
125.0
100.0
75.0
50.0
25.0
0.0
JKX
FTSE All-Share Index
FTSE All-Share Oil & Gas Producers Index
71
JKX Oil & Gas plc Annual Report 2017
JKX vs FTSE All-Share Index and FTSE All-Share Oil & Gas Producers Index
225.0
200.0
175.0
150.0
125.0
100.0
75.0
50.0
25.0
0.0
JKX
FTSE All-Share Index
FTSE All-Share Oil & Gas Producers Index
The table below details the Chief Executive’s “single figure” remuneration over a 9-year period. An investment of £100 in the Company
on 31 December 2008 was worth £4.0 at 31 December 2017 (same investment on 31 December 2008 was worth £17.10 at 31 December
2016). The calculation of the return assumes dividends are reinvested to purchase additional equity.
From 28 January 2016, the CEO’s remuneration was rebased to its equivalent US Dollar amount at that time. For years 2009 to 2015, the
CEO’s single figure remuneration amounts, which in previous Remuneration Reports were quoted in Sterling, have been converted into
their US Dollar equivalent in each year using the following average Sterling: US Dollar exchange rates as follows: 2009: £1:1.565;
$2010: £1:$1.546; 2011: £1:$1.604; 2012: £1:$1.585; 2013: £1:$1.565; 2014: £1:$1.648; 2015:£1: $1.529.
CEO single figure of remuneration -
Paul Davies ($’000)
CEO single figure of remuneration –
Tom Reed ($’000)
Total CEO single figure of
remuneration ($’000)
STI award rates against maximum
opportunity
LTI award rates against maximum
opportunity
2009
2010
2011
2012
2013
2014
2015
2016
2017
933
818
832
983
1,141
1,043
1,322
62
-
N/A
N/A
N/A
N/A
N/A
N/A
N/A
1,261
325
933
818
832
983
1,141
1,043
1,322
1,323
325
64%
40%
43%
33%
62%
33 %
86%
70%
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
Shareholder voting at the Annual General Meeting
At the Annual General Meeting (‘AGM’) held on 4 June 2014, the votes on the Directors’ Remuneration Policy, which came into effect on
1 January 2015, received the following votes from shareholders:
Total number of votes
% of votes cast
For
Against
84,771,713
20,033,549
Total votes cast (for and against, excluding withheld votes)
104,805,262
Votes witheld1
Total votes (for, against and withheld)
85,133
104,890,395
1. A withheld vote is not a vote in law and is not counted in the calculation of votes cast “for” and “against” a resolution
80.88%
19.12%
100 %
0.08%
72
GOVERNANCE
Directors’ Remuneration Report
JKX Oil & Gas plc Annual Report 2017
At the AGM held on 30 June 2017, the votes on the revised Directors’ Remuneration Policy, which has not been approved, received the
following votes from shareholders:
Total number of votes
% of votes cast
For
Against
20,865,585
84,759,100
Total votes cast (for and against, excluding withheld votes)
105,624,685
Votes witheld1
Total votes (for, against and withheld)
18,582
105,643,267
1. A withheld vote is not a vote in law and is not counted in the calculation of votes cast “for” and “against” a resolution
19.75%
80.25%
100 %
0.02%
At last year’s AGM held on 30 June 2017, the Directors’ Remuneration Report received the following votes from shareholders:
Total number of votes
% of votes cast
For
Against
55,154,208
50,470,947
Total votes cast (for and against, excluding withheld votes)
105,625,155
Votes witheld1
Total votes (for, against and withheld)
18,112
105,643,267
1. A withheld vote is not a vote in law and is not counted in the calculation of votes cast “for” and “against” a resolution
52.22%
47.78%
100 %
0.02%
Where shareholders voted against the revised Directors’ Remuneration Policy, this was in part due to what the shareholders considered
to be excessive reward for the Former Executive Directors that were in place during 2016-2017 for unsatisfactory operational,
financial and strategic management. Proposed new Future Policy was provided with the 2017 Notice of AGM.
73
JKX Oil & Gas plc Annual Report 2017
Executive Directors’ shareholding requirements (audited)
In 2010, the Committee introduced executive share ownership guidelines of 100% of basic salary for Executive Directors which can be
built up over a reasonable period of time from the date of appointment. No specific value per share was designated for the calculation.
Unvested share awards, including shares held in connection with compulsory bonus deferrals, are not taken into account in applying
this test. The table below shows the position at 31 December 2017, based on that day’s closing middle market price of an ordinary share
of the Company of 11.00 pence:
Shares
Options
Vested but
Unvested* and
subject to
subject to
Shareholding
Shareholding
Owned
holding period/
performance
Vested but not
requirement
at 31 Dec 2016
Requirement
outright
deferral
conditions
exercised
% salary/fee
% salary/fee
met?
-
-
-
-
-
-
100%
100%
-
-
No
No
Executive Directors –
removed 30 June 2017
Tom Reed
Russell Hoare
Non-Executive Directors
Hans Jochum Horn
Andrey Shtyrba
Adrian Coates
Michael Bakunenko
Vladimir Tatarchuk
Vladimir Rusinov
Non-Executive Directors –
resigned 24 October 2017
Paul Ostling
Alan Bigman
Bernie Sucher
-
-
-1
-1
-
-
-
1. Vladimir Tatarchuk and Vladimir Rusinov are deemed to have a beneficial interest in 34,288,253 ordinary shares and Convertible Bonds with principal amount of $3.4m, which
are held by Proxima Capital Group. At 31 December 2017, if fully converted, the convertible bonds held by Proxima would have resulted in the issue of a maximum of 2,819,077,
representing 1.64% of the issued share capital, based on the conversion price of 76.29 pence per ordinary share and a US$/GBP exchange rate of 1.5809. Further information on
the terms and conditions of the Convertible Bonds is disclosed in Notes 12 and 13 to the consolidated financial statements.
Since 31 December 2017, there have been no changes in the Directors’ interests in shares of the Company.
The report was approved by the Board of Directors and signed on its behalf by
Andrey Shtyrba
Chairman of the Remuneration Committee
27 April 2018
74
JKX Oil & Gas plc Annual Report 2017
Directors’ report – other disclosures
This information is required to be presented by law. The UKLA’s Disclosure & Transparency Rules (‘DTRs’) and Listing Rules (‘LRs’) also
require the Company to make certain disclosures.
The Corporate Governance Report, the Audit Committee Report and the Strategic report form part of this information. Disclosures
elsewhere in the Annual Report and Accounts are cross-referenced where appropriate. Taken together, they fulfil the combined
requirements of company law, the DTRs and LRs.
Legal form
JKX Oil & Gas plc is a company limited by shares and incorporated in England & Wales, with company number 3050645. The principal
activities of the Group are oil and gas exploration, appraisal, development and production. It conducts very limited business activities
on its own account, and trades principally through its subsidiary undertakings in various jurisdictions.
Annual General Meeting
Notice of the 2017 AGM and matters of Ordinary Business and those proposed as Special Business, together with explanatory notes,
will be sent to shareholders at least 20 working days before the meeting.
At the AGM, individual shareholders are given the opportunity to put questions to the Chairman and to other members of the Board.
The voting results are announced via the London Stock Exchange as soon as practicable after the meeting. The announcement is also
made on the Company’s corporate website.
Political and charitable contributions
In line with Group policy, the Group did not make any political contributions during the year (2016: nil). The Group made charitable
contributions of US$ 923,000 (2016: US$291,014) for local educational, health, sport and village infrastructure initiatives in Ukraine
and Russia.
Disabled employees
The Group gives full consideration to applications for employment from disabled persons where the requirements of the job can be
adequately fulfilled by such persons.
Should an existing employee become disabled, it is in the Group’s policy wherever practicable to provide continuing employment under
normal terms and conditions and to provide training and career development and promotion.
Greenhouse gas emissions
The disclosures concerning greenhouse gas emissions required by law are included in the Corporate Social Responsibility review on
pages 27 to 31.
Policy on derivatives and financial instruments
The Group’s objectives and policies on financial risk management, and information on the Group’s exposures to foreign exchange,
commodity price and liquidity risks can be found on pages 34 to 39 and in Note 14 to the financial statements.
Shares in JKX Oil & Gas plc
Details of movements in share capital during the year are set out in Note 16 to the financial statements. The Company has one class of
Ordinary Share which carries no right to fixed income. Each share carries the right to one vote at General Meetings of the Company.
There are no significant restrictions on the transfer of securities.
Treasury shares
In 2017, the Company did not purchase in the market any of its own ordinary 10p shares, to be held as treasury shares. At 31 December
2017, 402,771 (2016: 402,771) shares continued to be held as treasury shares representing 0.23% (2016: 0.23%) of the shares then in
issue.
Restrictions on voting
No member shall, unless the Directors otherwise determine, be entitled in respect of any share held by him/her to vote either
personally or by proxy at a shareholders’ meeting or to exercise any other right conferred by membership in relation to shareholders’
meetings if any call or other sum presently payable by him/her to the Company in respect of that share remains unpaid. In addition, no
member shall be entitled to vote if he/she has been served with a notice after failing to provide the Company with information
concerning interests in those shares required to be provided under the Companies Act.
Amendment of Articles of Association
Any amendments to the Articles may be made in accordance with the provisions of the Companies Act by way of special resolution.
75
JKX Oil & Gas plc Annual Report 2017
Directors
The names and biographies of the Directors who held office as at the date of this Annual Report are set out on pages 42 and 43.
Directors who held office throughout 2017 and the changes made to the Board at that date are set out below:
Name
Hans Jochum Horne
Andrey Shtyrba
Adrian Coates
Michael Bakunenko
Vladimir Rusinov
Vladimir Tatarchuk
Paul Ostling
Tom Reed
Russell Hoare
Vladimir Rusinov
Alan Bigman
Bernie Sucher
Appointed
24th October 2017
24th October 2017
8th December 2017
8th December 2017
8th December 2017
28th January 2016
Removed/Resigned
Position
Non Executive Chairman
Non Executive Director
Non Executive Director
Non Executive Director
Non Executive Director
Non Executive Director
Resigned 24th October 2017
Non Executive Chairman
Removed 30th June 2017
Removed 30th June 2017
Removed 30th June 2017
Chief Executive Officer
Chief Financial Officer
Non Executive Director
Resigned 24th October 2017
Non Executive Director
Resigned 24th October 2017
Non Executive Director
Appointment and replacement of Directors
The number of Directors shall not be less than two nor more than ten.
Directors may be appointed to the Board by shareholders by ordinary resolution or by the Board. A Director appointed by the Board
holds office only until the next following AGM and is then eligible for election by shareholders but is not taken into account in
determining the Directors, or the number of Directors who may be required to retire by rotation at that meeting.
Directors and their interests
The Directors in office at the year end and their interests at the beginning and end of the year in the shares of the Company, all
beneficially held, were as follows:
1 January 2017
Ordinary Share
Number
31 December 2017
Ordinary Share
Number
Hans Jochum Horn1
Not Applicable
Andrey Shtyrba 2
Not Applicable
Adrian Coates3
Not Applicable
-
-
-
Michael Bakunenko4 Not Applicable
See Note 4
Vladimir Tatarchuk 5 Not Applicable
See note 7
Vladimir Rusinov6
Not Applicable
See note 7
1. Appointed 24th October 2017
2. Appointed 24th October 2017
3. Appointed 8th December 2017
4. Michael Bakunenko was appointed on 8th December 2017 and is deemed to have a beneficial interest in 47,287,027 ordinary shares
5. Appointed 28 January 2016
6. Appointed 28th January 2016, removed 30th June 2017, reappointed 8th December 2017
7. Vladimir Tatarchuk and Vladimir Rusinov are deemed to have a beneficial interest in 34,288,253 ordinary shares and Convertible Bonds with principal amount of $3.4m, which
are held by Proxima Capital Group. If fully converted at 31 December 2017, the convertible bonds held by Proxima would result in the issue of a maximum of 2,819,077,
representing 1.64% of the issued share capital, based on the conversion price of 76.29 pence per ordinary share and a US$/GBP exchange rate of 1.5809. Further information on
the terms and conditions of the Convertible Bonds is disclosed in Notes 12 and 13 to the consolidated financial statements.
There were no changes to the shareholdings of the continuing Directors between the end of the financial year and the date of this
Annual Report.
76
JKX Oil & Gas plc Annual Report 2017
Directors’ report – other disclosures
Details of Directors’ remuneration and share options are shown in the Remuneration Report on pages 66 to 70. No Director had a
material interest in any significant contract, other than a service contract or contract for services, with the Company or any of its
subsidiary companies at any time during the year.
The share capital structure is listed in Note 16 to the financial statements and the significant holdings are listed below.
Directors’ indemnities
As permitted by the Articles of Association, the Directors have the benefit of an indemnity which is a qualifying third party indemnity
provision as defined by Section 234 of the Companies Act 2006. The indemnity was in force throughout the last financial year and is
currently in force. The Company also purchased and maintained throughout the financial year Directors’ and Officers’ liability
insurance in respect of itself and its Directors.
Change of control (significant contracts)
The Company is not party to any significant agreements that take effect, alter or terminate upon a change of control following a
takeover except for the $40m convertible bond dated 19 February 2013 (which, following repurchases and cancellation of bonds during
2016, has reduced to a nominal value of $16m, see Note 12 to the consolidated financial statements) which could become repayable
following a relevant change of control. There are no agreements between the Company and any Director or its employees that would
provide compensation for loss of office or employment resulting from a change of control following a takeover bid, except that
provisions of the Company’s share schemes may cause options and awards granted under such schemes to vest in those circumstances.
All of the Company’s share schemes contain provisions relating to a change of control. Outstanding options and awards would normally
vest and become exercisable for a limited period of time upon a change of control following a takeover, reconstruction or winding up of
the Company (not being an internal reorganisation), subject at that time to rules concerning the satisfaction of any performance
conditions. There are a number of other agreements that take effect, alter or terminate upon a change of control of the Company such
as commercial contracts, finance agreements and property lease arrangements. None of these is considered to be significant in terms of
their likely impact on the business of the Group as a whole.
Events after the reporting date
Events after the reporting date are discussed in Note 35 to the financial statements.
Substantial shareholders
At 31 December 2017 and at 28 February 2018, the Company had received notification from the following institutions of interests in
excess of 3% of the total number of voting rights of the Company:
Substantial shareholders
Eclairs Group Limited
Proxima Capital Group
Neptune Invest & Finance Corp
Keyhall Holding Limited
Interneft Ltd
31 December 2017
Number of shares
31 December 2017
% of total voting rights
28 February 2018
Number of shares
28 February 2018
% of total voting rights
47,287,027
34,288,253
22,295,598
19,656,344
11,368,460
27.54%
19.97%
12.98%
11.45%
6.62%
47,287,027
34,288,253
22,295,598
19,656,344
11,368,460
27.54%
19.97%
12.98%
11.45%
6.62%
Directors’ responsibilities statement
The Directors are responsible for preparing the Annual Report, the Directors’ Remuneration Report and the financial statements
in accordance with applicable law and regulation.
Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have
prepared the Group financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by
the European Union, and the parent company financial statements in accordance with United Kingdom Generally Accepted
Accounting Practice (United Kingdom Accounting Standards, comprising FRS 101 “Reduced Disclosure Framework”, and
applicable law). Under company law the Directors must not approve the financial statements unless they are satisfied that they
give a true and fair view of the state of affairs of the Group and the parent company and of the profit or loss of the Group and
parent company for that period. In preparing these financial statements, the Directors are required to:
select suitable accounting policies and then apply them consistently;
make judgements and accounting estimates that are reasonable and prudent;
state whether IFRSs as adopted by the European Union and applicable UK Accounting Standards have been followed for the
group financial statements and United Kingdom Accounting Standards, comprising FRS 101, have been followed for the parent
company financial statements, subject to any material departures disclosed and explained in the financial statements; and
prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and parent
company will continue in business.
77
JKX Oil & Gas plc Annual Report 2017
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group and
parent company’s transactions and disclose with reasonable accuracy at any time the financial position of the parent company
and the Group and enable them to ensure that the financial statements and the Remuneration Report comply with the Companies
Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation.
The Directors are also responsible for safeguarding the assets of the parent company and the Group and hence for taking
reasonable steps for the prevention and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the parent company’s website. Legislation in the United
Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Other disclosures
Certain information that is required to be included in the Directors’ Report can be found elsewhere in this document as referred to
below, each of which is, to the extent not in this report, incorporated by reference.
Dividends
No dividends have been paid or proposed for the year ended 31 December 2017. The Board will not be recommending the payment of a
dividend at the forthcoming AGM.
Going concern
The going concern statement can be found on page 90.
Future developments within the Group
The Strategic report starting on page 1 contains details of likely future developments within the Group.
Loss
Details of the Company’s loss for the year ended 31 December 2017 can be found on page 85.
Capitalised interest
No interest was capitalised in 2017 (2016: nil).
Long term incentive schemes
See pages 64 to 68 of the Directors’ Remuneration Report.
Directors’ responsibilities
Each of the Directors, whose names and functions are listed on pages 42 and 43, confirm that, to the best of their knowledge:
the parent company financial statements, which have been prepared in accordance with United Kingdom Generally Accepted
Accounting Practice (United Kingdom Accounting Standards, comprising FRS 101 “Reduced Disclosure Framework”, and applicable
law), give a true and fair view of the assets, liabilities, financial position and loss of the company;
the Group financial statements, which have been prepared in accordance with IFRSs as adopted by the European Union, give a true
and fair view of the assets, liabilities, financial position and loss of the Group;
the Annual Report includes a fair review of the development and performance of the business and the position of the Group and
parent company, together with a description of the principal risks and uncertainties that it faces; and
the annual report and financial statements, taken as a whole is fair, balanced and understandable and provides the information
necessary for shareholders to assess the Group and parent company's performance, business model and strategy;
In the case of each Director in office at the date the Directors’ Report is approved:
so far as the Director is aware, there is no relevant audit information of which the Group and parent company’s auditors are unaware;
and
he or she has taken all the steps that he or she ought to have taken as a Director in order to make himself or herself aware of any
relevant audit information and to establish that the Group and parent company’s auditors are aware of that information.
By order of the Board
Prism CoSec Ltd.
Company Secretary
27 April 2018
78
J JKX Oil & Gas plc Annual Report 2017
Independent Auditors’ Report
to the members of JKX Oil & Gas plc
Report on the audit of the group financial statements
Qualified opinion
In our opinion, except for the possible effects of the matter described in the “Basis for qualified opinion paragraph” below, JKX Oil & Gas
plc’s group financial statements (the “financial statements”):
give a true and fair view of the state of the group’s affairs as at 31 December 2017 and of its loss and cash flows for the year then
ended;
have been properly prepared in accordance with IFRSs as adopted by the European Union; and
have been prepared in accordance with the requirements of the Companies Act 2006 and Article 4 of the IAS Regulation.
We have audited the financial statements, included within the Annual Report, which comprise: the consolidated statement of financial
position as at 31 December 2017; the consolidated income statement and consolidated statement of comprehensive income, the
consolidated statement of cash flows, and the consolidated statement of changes in equity for the year then ended; and the notes to the
financial statements, which include a description of the significant accounting policies.
Our opinion is consistent with our reporting to the Audit Committee.
Basis for qualified opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our
responsibilities under ISAs (UK) are further described in the Auditors’ responsibilities for the audit of the financial statements section
of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our qualified
opinion.
As discussed in Note 1 to the group financial statements, there were a number of payments made to legal advisers in Ukraine during the
year ended 31 December 2017, which in total amounted to approximately $1.00m. The Audit Committee engaged an independent firm
to conduct a forensic examination of the process for appointment of legal advisers in Ukraine, the manner in which these specific
payments were made and to investigate the nature of such payments and services provided. While this investigation concluded there
was a breakdown in the group’s internal control in relation to the engagement and contracting with these legal advisers, the Committee
has not been able to conclude on the nature of the payments made, and the extent to which these were valid payments for legal services
provided. We have therefore not been able to obtain sufficient, appropriate audit evidence, and as such we are not able to conclude
whether the payments made to these advisers were for a proper purpose and are appropriately classified in the income statement. As a
result, our audit opinion is qualified in respect of this limitation on the scope of our audit.
Independence
We remained independent of the group in accordance with the ethical requirements that are relevant to our audit of the financial
statements in the UK, which includes the FRC’s Ethical Standard, as applicable to listed public interest entities, and we have fulfilled
our other ethical responsibilities in accordance with these requirements.
To the best of our knowledge and belief, we declare that non-audit services prohibited by the FRC’s Ethical Standard were not provided
to the group.
Other than those disclosed in the Directors’ Report, we have provided no non-audit services to the group in the period from 1 January
2017 to 31 December 2017.
Material uncertainty relating to going concern
Without further modifying our opinion on the financial statements, we have considered the adequacy of the disclosure made in note 2
to the financial statements concerning the group’s ability to continue as a going concern. At 31 December 2017, the Group has recorded
a provision of $37.1m in relation to additional Rental Fees which may become immediately due and payable in Ukraine as a result of
unfavourable outcomes in one or more of the ongoing court proceedings. These conditions, along with the other matters explained in
note 2 to the financial statements, indicate the existence of a material uncertainty which may cast significant doubt about the group’s
ability to continue as a going concern. The financial statements do not include the adjustments that would result if the group was
unable to continue as a going concern.
Explanation of material uncertainty
Note 2 to the financial statements details the directors’ disclosures of the material uncertainty relating to going concern.
As described in Note 2, the company’s Ukrainian subsidiary, Poltava Petroleum Company (‘PPC’) has made provision for potential
liabilities arising from separate court proceedings regarding the amount of production taxes (‘Rental Fees’) paid in Ukraine for certain
periods since 2010, which total approximately $37.1 million (including interest and penalties, see Note 27 to the financial statements).
PPC continues to contest these claims through the Ukrainian legal system. There is a risk that one or more of the ongoing court cases
ends with an unfavourable outcome, and amounts become immediately due and payable. If this were the case, the group may not have
sufficient cash to meet its obligations as they fall due.
Given this risk, the directors have drawn attention to this in disclosing a material uncertainty relating to going concern in the basis of
preparation to the financial statements.
79
JKX Oil & Gas plc Annual Report 2017
What audit procedures we performed
In concluding there is a material uncertainty, our audit procedures included updating our understanding of events in relation to the
ongoing disputes that have occurred in 2017 and up to the date of this report. We have explained this further in the Key Audit Matter
“Taxation in Ukraine - production taxes” below which deals with the accounting for the Rental Fees.
We obtained management’s cash flow forecast which supports their use of the going concern basis of accounting. We tested the
integrity of this model, including mathematical accuracy, and reviewed key assumptions such as forecast sales revenue, capital costs
and operating costs. We considered the consistency of the forecast with 2017 actuals and other forecasts made by management, for
example in impairment models. We also considered historical accuracy of management’s forecasting.
We reviewed management’s downside sensitivities and performed our own sensitivity analysis, focusing on reasonable downside
scenarios including lower than forecast production and lower commodity prices. We also understood the level of committed vs
discretionary spend to determine where costs could be reduced if necessary to mitigate any short term cash shortfall.
The base case going concern forecast does not include any outflows in respect of the Rental Fee exposures. The total amounts which
could become payable are material, and the group may not have sufficient cash to meet the obligations should they become
immediately due. This has been deemed a material uncertainty which, if realised, may affect the group’s ability to continue as a going
concern.
Our audit approach
Overview - materiality, audit scope, key audit matters
Overall group materiality: $1.15m (2016: $1.05m), based on 0.5% of total assets. We used a lower specific materiality for income
statement line items which was based on 1% of total revenues ($0.76m).
We identified three significant components out of the group's 37 reporting units, which we selected due to their size and contribution
to the group's total assets and revenues.
Specific audit procedures were performed on certain balances and transactions at a further two reporting units.
Payments to legal advisers in Ukraine.
Use of the going concern assumption.
Review of carrying value of oil and gas assets – Russia, Ukraine and Hungary.
Taxation in Ukraine - production taxes.
The scope of our audit
As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial statements.
In particular, we looked at where the directors made subjective judgements, for example in respect of significant accounting estimates
that involved making assumptions and considering future events that are inherently uncertain.
We gained an understanding of the legal and regulatory framework applicable to the group and the industry in which it operates, and
considered the risk of acts by the group which were contrary to applicable laws and regulations, including fraud. We designed audit
procedures at group and significant component level to respond to the risk, recognising that the risk of not detecting a material
misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate
concealment by, for example, forgery or intentional misrepresentations, or through collusion.
We focused on laws and regulations that could give rise to a material misstatement in the group and company financial statements,
including, but not limited to, the Companies Act 2006, the Listing Rules, UK tax legislation and equivalent local laws and regulations
applicable to significant component teams, and compliance with terms of oil and gas licences in the group's key operating locations. Our
tests included, but were not limited to, enquiries of management, review of minutes of meetings of the Board of Directors and review of
significant component auditors' work. There are inherent limitations in the audit procedures described above and the further removed
non-compliance with laws and regulations is from the events and transactions reflected in the financial statements, the less likely we
would become aware of it.
We found payments to legal advisers in Ukraine to be a key audit matter, and our opinion is qualified in this respect as discussed in the
Basis for qualified opinion paragraph above. As in all of our audits we also addressed the risk of management override of internal
controls, including testing journals and evaluating whether there was evidence of bias by the directors that represented a risk of
material misstatement due to fraud.
Key audit matters
Key audit matters are those matters that, in the auditors’ professional judgement, were of most significance in the audit of the financial
statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to
fraud) identified by the auditors, including those which had the greatest effect on: the overall audit strategy; the allocation of resources
in the audit; and directing the efforts of the engagement team. These matters, and any comments we make on the results of our
procedures thereon, were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion
thereon, and we do not provide a separate opinion on these matters. In addition to the matters described in the Basis for qualified
opinion and Material uncertainty relating to going concern sections, we have determined the matters described below to be the key
audit matters to be communicated in our report. This is not a complete list of all risks identified by our audit.
80
JKX Oil & Gas plc Annual Report 2017
Independent Auditors’ Report
to the members of JKX Oil & Gas plc
Key audit matter
How our audit addressed the key audit matter
Review of carrying value of oil and gas
assets- Russia, Ukraine and Hungary
Refer to page 58 (Audit Committee Report), page 97 (Critical
accounting estimates and assumptions) and page 101 (Property,
plant and equipment).
We examined management’s assessment of impairment
indicators for the group’s oil and gas assets, and agreed with
their conclusion that impairment triggers had arisen on the
Novomykolaivske, Koshekhablskoye and Hajdunanas IV
CGU’s.
Oil and gas assets in Russia, Ukraine and Hungary recorded
within Property, plant & equipment total $193.0m at the 2017
year-end after the recognition of an impairment charge of $2.8m
and an impairment reversal of $5.6m. We focused on this area
due to the material nature of the balance and the judgement
involved in impairment assessments, which depend on estimates
of forward looking data including oil and gas production,
commodity prices and future costs.
Ukraine
There are two Cash Generating Units (“CGU”) in Ukraine. Due to a
revision to field development plans and resulting reduction in
2P reserves, management identified an impairment trigger in
respect of the Novomykolaivske CGU. The resulting impairment
test showed no impairment loss had occurred.
In respect of the Elizavetivske CGU, due to better than expected
production in 2017 and upward revision in reserves,
management have identified an impairment reversal of $5.6m
which has arisen in the year.
Russia
In 2017, there were delays in completing the workover of well 5,
which resulted in cost overruns and production from the
Koshekhablskoye CGU being lower than forecast. Management
concluded this represented an impairment trigger and
performed an impairment test, which showed no impairment
loss had arisen.
Hungary
An impairment trigger was identified on the Hajdunanas IV CGU
in Hungary due to 2017 production being lower than forecast in
the 2016 impairment test. As a result of management’s
impairment test, the Hajdunanas IV assets were written off in
full.
Accordingly, we obtained management’s impairment
assessments and performed the following procedures:
Tested that management’s calculation of recoverable
amount, based on Fair Value Less Costs of Disposal
(“FVLCD”), was in line with accounting standards;
Obtained management’s internal reserves reassessment
and understood changes to 2P reserves compared to the
prior year, when reserves were supported by an updated
Competent Person’s Report (“CPR”). We also considered the
competence of management’s internal experts to conclude
that the closing 2P reserves figures were reliable;
Compared management’s forecast oil and gas prices to
consensus forecasts obtained from a collection of brokers
and independent consultants. We found that
management’s forecasts were within a reasonable range of
the consensus forecasts;
For the Koshekhablskoye CGU, where prices are regulated,
we compared the 2018 price forecast to current contracted
prices and confirmed the appropriateness of assumed
inflationary price increases thereafter by agreeing to a
Russian Ministry of Economics forecast;
Compared capital and operating cost forecasts to latest
field development plans, and considered changes since the
prior year CPR, taking into account 2017 capital programs.
We also considered historical forecasting accuracy of
management to assess that future cost estimates are
reliable; and
Benchmarked the key inputs into management’s discount
rates to arrive at a range we considered reasonable.
Management’s discount rates for each CGU were within
this range.
We also evaluated the disclosure of impairment tests in the
financial statements and concluded these are appropriate.
In respect of the Elizavetivske impairment reversal, we
obtained management’s cash flow model prepared under a
FVLCD methodology. We tested assumptions by performing
the same procedures as those outlined above. We also tested
that the amount of the impairment reversal was appropriate,
taking into account the requirements of IAS 36 as they apply
to impairment reversals.
Taxation in Ukraine - production taxes
Refer to page 57 (Audit Committee Report) and page 116
(Provisions) and page 120 (Taxation).
The Group is subject to a number of challenges by the tax
authorities in Ukraine concerning Rental Fees for periods from
April to December 2010 and January to December 2015. The
We updated our understanding of events in relation to the
ongoing disputes that have occurred in 2017 and up to the
date of this report. This included discussions with our
internal legal specialists in Ukraine, the Group’s internal
legal department and review of the High Court ruling in the
United Kingdom.
2010 case
81
JKX Oil & Gas plc Annual Report 2017
total assessments as well as potential interest and penalties for
these periods are recorded as provisions in the consolidated
statement of financial position and total $37.1m (2016: $33.9m).
The movement in the year is attributable to accrual of additional
late payment interest and fluctuations in the UAH to USD
exchange rate.
International arbitration
Separate from Ukrainian court proceedings, as set out in the
Group’s 2016 Annual Report, the Group pursued an award from
an international arbitrator alleging breaches by Ukraine of its
obligations under certain international treaties. The tribunal
decision was released in February 2017, which dismissed the
Company’s main claim of excessive levying of Rental Fees by
Ukraine but awarded the Company damages of $11.8m plus
interest and costs of $0.3m in relation to subsidiary claims.
The Ukrainian government lodged an appeal against the tribunal
award in the High Court of the United Kingdom. In October 2017,
the High Court dismissed the appeal and there are no further
avenues of appeal for the Ukrainian government. Management
have disclosed a contingent asset in respect of this award due to
some doubt about the likely success of enforcement of the
tribunal award in Ukrainian courts.
There are multiple legal proceedings in respect of the 2010
case in which the Group is challenging both the tax
authorities application of tax law and also the conduct of the
tax audit. While the Group were successful in the most recent
court hearings in respect of the 2010 dispute, there remains
legal avenues for appeal for the Ukrainian government
including a pending cassation hearing in the Supreme Court
of Ukraine. The outcome of the cassation hearing is difficult
to predict, so we agree with management it is appropriate to
continue to recognise a provision in respect of the 2010
exposure.
2015 case
The negative outcome of the main international tribunal
panel hearing delivered in February 2017 in respect of the
Group’s main claim of excessive levying of Rental Fees by
Ukraine increased the likelihood of a potential cash outflow
in respect of the 2015 dispute. This is because the Group
relied on an interim award from the tribunal delivered in July
2015 in filing and paying Rental Fees in 2015 at a lower rate
of 28% compared to the statutory rate of 55%, which has led
to this exposure. There have not been any major
developments in 2017. Actions in the Ukrainian courts were
suspended pending the outcome of the tribunal hearing and
have not yet resumed. Notwithstanding this, considering the
ruling by the tribunal in February 2017 which dismissed the
Group’s main claim, we concur with management the
likelihood of a cash outflow in respect of the underpaid
Rental Fees in 2015 is probable and it is appropriate to retain
a provision in the financial statements.
Arbitration award
As stated above, the Group was unsuccessful in respect of its
main claim to the international tribunal however the
tribunal awarded the Group $11.8m in damages plus interest,
and costs of $0.3m in relation to subsidiary claims. In October
2017, the High Court dismissed the Ukrainian government’s
appeal. While binding under international law, the tribunal
ruling still requires enforcement in the Ukrainian courts. As
such, we concur with management that it is appropriate not
to record a receivable at this time, given the uncertainty
regarding its legalisation in Ukraine and hence eventual
collection. The potential inflow of economic benefits is
appropriately disclosed as a contingent asset in Note 27 of
the financial statements.
How we tailored the audit scope
We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as
a whole, taking into account the structure of the group, the accounting processes and controls, and the industry in which it operates.
The Group is structured along four operating segments being Ukraine, Russia, UK and the Rest of World as set out in Note 4. The
financial statements are a consolidation of 37 reporting units, comprising the Group’s operating businesses and centralised functions
within these segments. We performed full scope audit procedures over the financial information of three reporting units, one located in
the UK and one each in Russia and Ukraine. Because of their size, this gave us coverage of over 99% of group revenues. Audit
procedures were also performed on specific financial statement line items in a further two reporting units, including a UK service
company and an operating entity in Hungary.
Apart from the full scope audits performed over the Ukrainian and Russian reporting entities, all work was performed by the UK group
engagement team. The group engagement team also performed certain audit procedures in respect of the Russian and Ukrainian
entities, namely work over management's impairment reviews and assessment of cash flows contributed by these entities forming part
of the group's going concern assessment.
82
JKX Oil & Gas plc Annual Report 2017
Independent Auditors’ Report
to the members of JKX Oil & Gas plc
We also visited the group's operating locations in Russia and Ukraine during the 2017 audit cycle, including meeting with local
management and our component audit teams.
Materiality
The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These,
together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit
procedures on the individual financial statement line items and disclosures and in evaluating the effect of misstatements, both
individually and in aggregate on the financial statements as a whole.
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
Overall group materiality
$1.15m (2016: $1.05m).
How we determined it
0.5% of total assets.
Rationale for benchmark applied
We considered the activities of the group and also materiality levels used by auditors of other
similar upstream oil and gas companies. Due to the Group’s declining profitability, and given
a significant portion of the group’s value is captured in oil and gas assets, we believe an asset
measure is the most relevant. We used a lower specific materiality for certain income
statement financial statement line items. This approach reflects the relative size of income
statement balances when compared to the balance sheet. This specific materiality was
calculated based on 1% of total revenues ($0.76m).
For each component in the scope of our group audit, we allocated a materiality that is less than our overall group materiality. The range
of materiality allocated across components was between $0.60m and $1.00m.
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above $0.06m (2016:
$0.05m) as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons.
Going concern
In accordance with ISAs (UK) we report as follows:
Reporting obligation
Outcome
We are required to report if we have anything material to add or draw
attention to in respect of the directors’ statement in the financial
statements about whether the directors considered it appropriate to
adopt the going concern basis of accounting in preparing the financial
statements and the directors’ identification of any material
uncertainties to the group’s ability to continue as a going concern over
a period of at least twelve months from the date of approval of the
financial statements.
We are required to report if the directors’ statement relating to Going
Concern in accordance with Listing Rule 9.8.6R(3) is materially
inconsistent with our knowledge obtained in the audit.
Reporting on other information
We have nothing material to add or to draw attention to other
than the material uncertainty we have described in the
material uncertainty relating to going concern section above.
However, because not all future events or conditions can be
predicted, this statement is not a guarantee as to the group’s
ability to continue as a going concern.
We have nothing to report.
The other information comprises all of the information in the Annual Report other than the financial statements and our auditors’
report thereon. The directors are responsible for the other information. Our opinion on the financial statements does not cover the
other information and, accordingly, we do not express an audit opinion or, except to the extent otherwise explicitly stated in this
report, any form of assurance thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider
whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or
otherwise appears to be materially misstated. If we identify an apparent material inconsistency or material misstatement, we are
required to perform procedures to conclude whether there is a material misstatement of the financial statements or a material
misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of
this other information, we are required to report that fact. We have nothing to report based on these responsibilities.
With respect to the Strategic Report and Directors’ Report, we also considered whether the disclosures required by the UK Companies
Act 2006 have been included.
Based on the responsibilities described above and our work undertaken in the course of the audit, the Companies Act 2006, (CA06),
ISAs (UK) and the Listing Rules of the Financial Conduct Authority (FCA) require us also to report certain opinions and matters as
described below (required by ISAs (UK) unless otherwise stated).
83
JKX Oil & Gas plc Annual Report 2017
Strategic Report and Directors’ Report
In our opinion, based on the work undertaken in the course of the audit, the information given in the Strategic Report and Directors’
Report for the year ended 31 December 2017 is consistent with the financial statements and has been prepared in accordance with
applicable legal requirements. (CA06)
In light of the knowledge and understanding of the group and its environment obtained in the course of the audit, we did not identify
any material misstatements in the Strategic Report and Directors’ Report. (CA06)
The directors’ assessment of the prospects of the group and of the principal risks that would threaten the solvency or liquidity of the
group
We have nothing material to add or draw attention to regarding:
The directors’ confirmation on page 40 of the Annual Report that they have carried out a robust assessment of the principal risks
facing the group, including those that would threaten its business model, future performance, solvency or liquidity.
The disclosures in the Annual Report that describe those risks and explain how they are being managed or mitigated.
The directors’ explanation on page 40 of the Annual Report as to how they have assessed the prospects of the group, over what period
they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable
expectation that the group will be able to continue in operation and meet its liabilities as they fall due over the period of their
assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions.
We have nothing to report having performed a review of the directors’ statement that they have carried out a robust assessment of the
principal risks facing the group and statement in relation to the longer-term viability of the group. Our review was substantially less in
scope than an audit and only consisted of making inquiries and considering the directors’ process supporting their statements;
checking that the statements are in alignment with the relevant provisions of the UK Corporate Governance Code (the “Code”); and
considering whether the statements are consistent with the knowledge and understanding of the group its environment obtained in
the course of the audit. (Listing Rules)
Other Code Provisions
We have nothing to report in respect of our responsibility to report when:
The statement given by the directors, on page 77, that they consider the Annual Report taken as a whole to be fair, balanced and
understandable, and provides the information necessary for the members to assess the group’s position and performance, business
model and strategy is materially inconsistent with our knowledge of the group obtained in the course of performing our audit.
The section of the Annual Report on page 56 describing the work of the Audit Committee does not appropriately address matters
communicated by us to the Audit Committee.
The directors’ statement relating to the company’s compliance with the Code does not properly disclose a departure from a relevant
provision of the Code specified, under the Listing Rules, for review by the auditors.
Responsibilities for the financial statements and the audit
Responsibilities of the directors for the financial statements
As explained more fully in the Directors’ responsibilities statement set out on pages 76-77, the directors are responsible for the
preparation of the financial statements in accordance with the applicable framework and for being satisfied that they give a true and
fair view. The directors are also responsible for such internal control as they determine is necessary to enable the preparation of
financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the directors are responsible for assessing the group’s ability to continue as a going concern,
disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either
intend to liquidate the group or to cease operations, or have no realistic alternative but to do so.
Auditors’ responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high
level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material
misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the
aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial
statements.
A further description of our responsibilities for the audit of the financial statements is located on the FRC’s website at:
www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditors’ report.
Use of this report
This report, including the opinions, has been prepared for and only for the company’s members as a body in accordance with Chapter 3
of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for
any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by
our prior consent in writing.
84
JKX Oil & Gas plc Annual Report 2017
Independent Auditors’ Report
to the members of JKX Oil & Gas plc
Other required reporting
Companies Act 2006 exception reporting
In respect solely of the limitation on our work relating to payments to legal advisers in Ukraine, described in the Basis for qualified
opinion paragraph above, we have not obtained all the information and explanations that we considered necessary for the purpose of
our audit.
Under the Companies Act 2006 we are required to report to you if, in our opinion certain disclosures of directors’ remuneration
specified by law are not made. We have no exceptions to report arising from this responsibility.
Appointment
Following the recommendation of the audit committee, we were appointed by the members on 18 May 2006 to audit the financial
statements for the year ended 31 December 2006 and subsequent financial periods. The period of total uninterrupted engagement is 12
years, covering the years ended 31 December 2006 to 31 December 2017.
Other matter
We have reported separately on the company financial statements of JKX Oil & Gas plc for the year ended 31 December 2017 and on the
information in the Directors’ Remuneration Report that is described as having been audited. That report includes a material
uncertainty related to going concern section.
Kevin Reynard (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
27 April 2018
85
JKX Oil & Gas plc Annual Report 2017
GROUP FINANCIAL STATEMENTS
Consolidated income statement
For the year ended 31 December 2017
Revenue
Cost of sales
Exceptional item –production based taxes
Exceptional item - reversal of provision for impairment of Ukrainian oil and gas assets
Exceptional item – provision for impairment of Hungary and Slovakia
Exceptional item – write off of appraisal expenditure in Ukraine
Other production based taxes
Other cost of sales
Total cost of sales
Gross profit/(loss)
Disposal of property, plant and equipment
Exceptional items
Other administrative expenses
Total administrative expenses
Gain on foreign exchange
Profit/(loss) from operations before exceptional items
Loss from operations after exceptional items
Finance income
Finance costs
Fair value movement on derivative liability
Loss before tax
Taxation – current
Taxation – deferred
- before the exceptional items
- on the exceptional items
Total taxation
Loss for the year attributable to equity shareholders of the parent company
Basic loss per 10p ordinary share (in cents)
- before exceptional items
- after exceptional items
Diluted loss per 10p ordinary share (in cents)
- before exceptional items
- after exceptional items
Note
2017
$000
2016
$000
4
18
5
5
5
20
20
20
5
19
21
22
13
27
27
27
27
29
29
29
29
76,436
73,848
(4,357)
(24,340)
5,636
(11,450)
(9,391)
(16,956)
(36,647)
-
(2,000)
-
(17,737)
(38,290)
(73,165)
(82,367)
3,271
(548)
(1,513)
(8,519)
-
(4,484)
(15,862)
(22,182)
(17,923)
(26,666)
1,424
7,847
431
(3,930)
(13,228)
(34,754)
348
(3,164)
(3)
1,836
(4,636)
(599)
(16,047)
(38,153)
(2,964)
(1,341)
(2,765)
4,113
(1,616)
1,209
1,170
1,038
(17,663)
(37,115)
(0.41)
(10.26)
(0.41)
(10.26)
(4.34)
(21.56)
(4.34)
(21.56)
86
JKX Oil & Gas plc Annual Report 2017
GROUP FINANCIAL STATEMENTS
Consolidated statement of comprehensive income
For the year ended 31 December 2017
Loss for the year
Other comprehensive income to be reclassified to profit or loss in subsequent periods when specific
conditions are met
Currency translation differences
Other comprehensive income that will not be reclassified to profit or loss in subsequent periods
Remeasurements of post-employment benefit obligations
Other comprehensive income for the year, net of tax
Total comprehensive income attributable to:
Equity shareholders of the parent
2017
$000
2016
$000
(17,663)
(37,115)
7,118
19,634
(333)
6,785
-
19,634
(10,878)
(17,481)
87
JKX Oil & Gas plc Annual Report 2017
GROUP FINANCIAL STATEMENTS
Consolidated statement of financial position
For the year ended 31 December 2017
ASSETS
Non-current assets
Property, plant and equipment
Intangible assets
Other receivable
Deferred tax assets
Current assets
Inventories
Trade and other receivables
Restricted cash
Cash and cash equivalents
Total assets
LIABILITIES
Current liabilities
Current tax liabilities
Trade and other payables
Borrowings
Provisions
Derivatives
Non-current liabilities
Provisions
Other payables
Borrowings
Derivatives
Deferred tax liabilities
Total liabilities
Net assets
EQUITY
Share capital
Share premium
Other reserves
Retained earnings
Total equity
Note
2017
$000
2016
$000
5(a)
5(b)
6
28
8
9
10
10
11
12
18
13
18
12
13
28
16
17
194,031
194,510
-
3,136
20,840
7,706
3,277
18,724
218,007
224,217
5,824
4,969
497
6,929
18,219
4,585
4,174
201
14,067
23,027
236,226
247,244
(645)
(592)
(12,368)
(15,095)
(7,630)
(16,795)
(37,269)
(34,510)
-
(1,341)
(57,912)
(68,333)
(5,341)
(3,136)
(9,003)
(3)
(14,922)
(32,405)
(90,317)
(4,264)
(3,277)
-
-
(14,537)
(22,078)
(90,411)
145,909
156,833
26,666
97,476
26,666
97,476
(153,126)
(159,911)
174,893
192,602
145,909
156,833
These financial statements on pages 85 to 125 were approved by the Board of Directors on 27 April 2018 and signed on its behalf by:
Hans Jochum Horn Chairman
Ben Fraser Chief Financial Officer
88
JKX Oil & Gas plc Annual Report 2017
GROUP FINANCIAL STATEMENTS
Consolidated statement of changes in equity
For the year ended 31 December 2017
At 1 January 2016
Loss for the year
Exchange differences arising on translation of overseas
operations
Total comprehensive loss attributable to equity
shareholders of the parent
Transactions with equity shareholders of the parent
Share-based payment charge
Total transactions with equity shareholders of the parent
Attributable to equity shareholders of the parent
Share
capital
$000
Share
premium
$000
Retained
Earnings
$000
Other
reserves
(Note 17)
$000
Total
equity
$000
26,666
97,476
229,669
(179,545)
174,266
-
-
-
-
-
-
-
-
-
-
(37,115)
-
(37,115)
-
19,634
19,634
(37,115)
19,634
(17,481)
48
48
-
-
48
48
At 31 December 2016
26,666
97,476
192,602
(159,911)
156,833
At 1 January 2017
Loss for the year
Exchange differences arising on translation of overseas
operations
Remeasurement of post-employment benefit obligations
Total comprehensive loss attributable to equity
shareholders of the parent
Transactions with equity shareholders of the parent
Share-based payment credit
Total transactions with equity shareholders of the parent
26,666
97,476
192,602
(159,911)
156,833
-
-
-
-
-
-
-
-
-
-
-
-
(17,663)
-
(17,663)
-
-
7,118
7,118
(333)
(333)
(17,663)
6,785
(10,878)
(46)
(46)
-
-
(46)
(46)
At 31 December 2017
26,666
97,476
174,893
(153,126)
145,909
Share premium represents the amounts received by the Company on the issue of its shares which were in excess of the nominal value
of the shares.
Retained earnings represent the cumulative net gains and losses recognised in the statement of comprehensive income less any
amounts reflected directly in other reserves.
89
JKX Oil & Gas plc Annual Report 2017
GROUP FINANCIAL STATEMENTS
Consolidated statement of cash flows
For the year ended 31 December 2017
Cash flows from operating activities
Cash generated from operations
Interest paid
Income tax paid
Net cash generated from operating activities
Cash flows from investing activities
Interest received
Dividend received
Proceeds from sale of property, plant and equipment
Purchase of intangible assets
Purchase of property, plant and equipment
Net cash used in investing activities
Cash flows from financing activities
Restricted cash
Repayment of borrowings
Repurchase of convertible bonds
Net cash used in financing activities
Decrease in cash and cash equivalents in the year
Cash and cash equivalents at 1 January
Effect of exchange rates on cash and cash equivalents
Cash and cash equivalents at 31 December
Note
31
2017
$000
2016
$000
15,723
(1,760)
(2,933)
17,038
(2,392)
(10)
11,030
14,636
348
114
291
(9,581)
(7,131)
(15,959)
753
-
550
(90)
(7,366)
(6,153)
(296)
111
(1,920)
(10,856)
-
(2,216)
(7,145)
14,067
7
(9,036)
(19,781)
(11,298)
25,943
(578)
10
6,929
14,067
90
JKX Oil & Gas plc Annual Report 2017
GROUP FINANCIAL STATEMENTS
Notes to consolidated financial statements
1. General information
JKX Oil & Gas plc (the ultimate parent of the Group hereafter, ‘the Company’) is a public limited company listed on the London Stock
Exchange which is domiciled and incorporated in England and Wales under the UK Companies Act. The registered number of the
Company is 3050645. The registered office is 6 Cavendish Square, London, W1G 0PD and the principal place of business is disclosed in
the introduction to the Annual Report.
The principal activities of the Company and its subsidiaries, (the ‘Group’), are the exploration for, appraisal and development of oil and
gas reserves.
As described in the Chairman’s statement on page 5, an investigation into the procurement of legal services in Ukraine, and subsequent
payments made to legal advisers, has been commissioned by the Audit Committee and is now complete. While this investigation
concluded there was a breakdown in the group’s internal control in relation to the engagement and contracting with these legal
advisers, the Committee has not been able to conclude on the nature of the payments made, and the extent to which these were valid
payments for legal services provided. The current Board has introduced a number of measures to strengthen the Company’s internal
control systems and this work is underway.
2. Basis of preparation
The Group’s financial statements have been prepared in accordance with International Financial Reporting Standards (‘IFRSs’) as
adopted by the European Union, IFRS Interpretations Committee (‘IFRS IC’) interpretations and the Companies Act 2006 applicable for
Companies reporting under IFRS and therefore the consolidated financial statements comply with Article 4 of the EU IAS Regulations.
The Group’s financial statements have been prepared under the historical cost convention, as modified for derivative instruments held
at fair value through profit or loss. The principal accounting policies adopted by the Group are set out below.
Going concern
The majority of the Group’s revenues, profits and cash flow from operations are currently derived from its oil and gas production in
Ukraine, rather than Russia.
The Company’s Ukrainian subsidiary, Poltava Petroleum Company (‘PPC’) has made provision for potential liabilities arising from
separate court proceedings regarding the amount of production taxes (‘Rental Fees’) paid in Ukraine for certain periods since 2010,
which total approximately $37.1 million (including interest and penalties, see Note 27 to the consolidated financial statements). PPC
continues to contest these claims through the Ukrainian legal system.
In February 2017, the international arbitration tribunal ruled that Ukraine was found not to have violated its treaty obligations in
respect of the levying of Rental Fees but awarded the Company damages of $11.8 million plus interest, and costs of $0.3 million in
relation to subsidiary claims. No adjustment has been made in these financial statements to recognise any possible future benefit to the
Company, with the tribunal ruling subject to enforcement proceedings in Ukrainian courts.
Taking into account the damages awarded to the Company and the Ukrainian court proceedings against PPC in respect of production
taxes, there is a net shortfall of $25 million owed by the Group to Ukraine. Should PPC lose the claims against it in respect of production
taxes due for 2010 and 2015, and the Ukrainian Authorities demand immediate settlement, the Group does not currently have
sufficient cash resources to settle the claims and this would affect its ability to meet its obligations to creditors and bondholders.
Accordingly, the Group’s going concern assessment is sensitive to the outcome of the production-related tax disputes with the
Ukrainian Government.
The Directors have concluded that it is necessary to draw attention to the potential impact of the Group becoming liable for additional
Rental Fees in Ukraine as a result of unfavourable outcomes in one or both of the ongoing court proceedings. It is unclear whether
either or both of these claims against PPC will be realised and settlement enforced but they are material uncertainties which may cast
significant doubt about the Group’s ability to continue as a going concern.
However, based on the Group’s cash flow forecasts, the Directors believe that the combination of its current cash balances, expected
future production and resulting net cash flows from operations, as well as the availability of additional courses of action with respect to
financing and/or negotiation with Ukraine for the settlement of any successful production tax claim, mean that it is appropriate to
continue to adopt the going concern basis of accounting in preparing these financial statements. These financial statements do not
include the adjustments that would result if the Group was unable to continue as a going concern.
91
JKX Oil & Gas plc Annual Report 2017
Adoption of new and revised standards
The disclosed policies have been applied consistently by the Group for both the current and previous financial year with the exception
of the new standards adopted.
The EU IFRS financial information has been drawn up on the basis of accounting policies consistent with those applied in the financial
statements for the year to 31 December 2016, except for the following:
IAS 7 ‘Statement of cash flows’ (Amendments)
IAS 12 ‘Income taxes’ (Amendments)
01-Jan-17
01-Jan-17
The application of the amendments has had no impact on the disclosures of the amounts recognized in the Group’s consolidated
financial statements.
Below is a list of new and revised IFRSs that are not yet mandatorily effective (but allow early application) for the year ending 31
December 2017 and have not been early adopted by the Group. The Group’s assessment of the impact of these new standards and
interpretations is set out below:
IFRS15 ‘Revenue from contracts with customers’
Effective for annual periods
beginning on or after
01-Jan-18
The IASB has issued a new standard for the recognition of revenue. This will replace IAS 18 which covers contracts for goods and
services and IAS 11 which covers construction contracts. The new standard is based on the principle that revenue is recognised when
control of a good or service transfers to a customer. The standard permits either a full retrospective or a modified retrospective
approach for the adoption.
To assess the impact of IFRS 15 on the Group’s revenue recognition, a 5-step model had been applied to analyse sales contracts in
Ukraine, Russia and Hungary. According to the analysis carried out by the Group, the current practice of revenue recognition complies
with the new IFRS 15 revenue recognition standard and no impact is expected from the adoption of the new standard on 1 January
2018.
IFRS 9 ‘Financial instruments’
01-Jan-18
The Group has reviewed its financial assets and is expecting no impact from the adoption of the new standard on 1 January 2018. The
majority of the Group’s financial assets that are currently classified at amortised cost will satisfy the conditions for classification at
amortised cost and hence there will be no change to the classification for these assets. However, investments in equity instruments do
not meet the criteria to be classified at amortised cost and will have to be reclassified to financial assets at fair value through profit or
loss as of 1 January 2018. The Group is currently estimating the impact of reclassification on the value of its unlisted investment as
there is a lack of liquid market and the fair value is judgemental.
We have also focused on the potential impact of transition to IFRS 9 on the carrying value of trade receivables. The new impairment
model requires the recognition of impairment provisions based on expected credit losses (ECL) rather than only incurred credit losses
as is the case under IAS 39. It applies to financial assets classified at amortised cost, debt instruments measured at FVOCI, contract
assets under IFRS 15 Revenue from Contracts with Customers, lease receivables, loan commitments and certain financial guarantee
contracts. The Group does not expect the new guidance in IFRS 9 to result in material changes to impairment provisioning based on the
assessments undertaken to date.
Financial liabilities held by the Group comprise of trade and other payables and Convertible Bonds due 19 February 2020. Convertible
Bonds were restructured on 3 January 2017. The Group has reviewed its financial liabilities and is expecting no impact from the
adoption of the new standard on 1 January 2018:
Under IAS 39 the revised terms and conditions of the Bond were considered to be a modification and therefore the difference in the
amortised cost carrying amount at the modification date was recognised through a change in the effective interest rate at the
modification date through to the end of the revised estimated term of the Bond. In accordance with IFRS 9, following a modification or
renegotiation of a financial asset or financial liability that does not result in de-recognition, an entity is required to recognise any
modification gain or loss immediately in profit or loss. Any gain or loss is determined by recalculating the gross carrying amount of the
financial liability by discounting the new contractual cash flows using the original effective interest rate. The difference between the
original contractual cash flows of the Bond and the modified cash flows discounted at the original effective interest rate is trivial and
hence there will be no impact on adoption of IFRS 9 on 1 January 2018.
IFRS 2 ‘Share-based payment’ (Amendments)
IFRS 16 ‘Leases’
01-Jan-18
01-Jan-19
As a Lessee, the Group is required to recognise all lease contracts on the balance sheet subject to certain, limited exceptions. The Group
will not be required to recognise lease contracts with a term of less than 12 months on the balance sheet. The Group is currently
assessing the impact of IFRS 16.
92
JKX Oil & Gas plc Annual Report 2017
GROUP FINANCIAL STATEMENTS
Notes to consolidated financial statements
3. Significant accounting policies
Basis of consolidation
The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its
subsidiaries) made up to 31 December each year. All intragroup balances, transactions, income and expenses and profits or losses,
including unrealised profits arising from intragroup transactions, have been eliminated on consolidation.
Subsidiaries are all entities (including structured entities) over which the Group has control. The Group controls an entity when the
Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns
through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They
are deconsolidated from the date that control ceases. The consolidated financial statements include all the assets, liabilities, revenues,
expenses and cash flows of the Companies and their subsidiaries after eliminating intragroup transactions as noted above. Uniform
accounting policies are applied across the Group.
Interests in joint arrangements
A joint arrangement is one in which two or more parties have joint control. Joint control is the contractually agreed sharing of control of
an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing
control.
Where the Group’s activities are conducted through joint operations, whereby the parties that have joint control of the arrangement
have the rights to the assets, and obligations for the liabilities, relating to the arrangement, the Group reports its interests in joint
operations using proportionate consolidation – the Group’s share of the assets, liabilities, income and expenses of the joint operation
are combined with the equivalent items in the consolidated financial statements on a line-by-line basis.
A joint venture, which normally involves the establishment of a separate legal entity, is a contractual arrangement whereby the parties
that have joint control of the arrangement have the rights to the arrangement’s net assets. The results, assets and liabilities of a joint
venture are incorporated in the consolidated financial statements using the equity method of accounting.
Where the Group transacts with its joint operations, unrealised profits and losses are eliminated to the extent of the Group’s interest in
the joint operation.
Foreign currencies
All amounts in these financial statements are presented in thousands of US dollars, unless otherwise stated. The presentation currency
of the Group is the US Dollar based on the fact that the Group’s primary transactions originate in, or are dictated by, the US Dollar, these
being, amongst others, oil sales and procurement of rigs and drilling services.
Each entity in the Group is measured using the currency of the primary economic environment in which the entity operates (‘the
functional currency’). Foreign currency transactions are translated into functional currency using the exchange rates prevailing at the
dates of the transactions or valuation where items are re-measured. Foreign exchange gains and losses resulting from the settlement
of such transactions and from translation at year-end exchange rates of monetary assets and liabilities denominated in foreign
currencies are recognised in the income statement.
On consolidation of subsidiaries and joint operations with a non US Dollar presentation currency, their statements of financial position
are translated into US Dollar at the closing rate and income and expenses at the average monthly rate. All resulting exchange
differences arising in the period are recognised in other comprehensive income, and cumulatively in the Group’s translation reserve.
Such translation differences are reclassified to profit or loss in the period in which any such foreign operation is disposed of.
Subsidiaries within the Group hold monetary intercompany balances for which settlement is neither planned nor likely to occur in the
foreseeable future and thus this is considered to be part of the Group’s net investment in the relevant subsidiary. An exchange
difference arises on translation in the company income statement which on consolidation is recognised in equity, only being recognised
in the income statement on the disposal of the net investment.
The major exchange rates used for the revaluation of the closing statement of financial position at 31 December 2017 were $1:£0.74
(2016: $1:£ 0.81), $1: 28.07 Hryvnia (2016: $1: 27.19 Hryvnia), $1: 57.60 Roubles (2016: $1: 60.66 Roubles), $1: 258.63 Hungarian Forint
(2016: $1: 293.40 Hungarian Forint).
Goodwill and fair value adjustments arising on acquisition are treated as assets/liabilities of the foreign entity and translated at the
closing rate.
Property, plant and equipment and other intangible assets
Property plant and equipment comprises the Group’s tangible oil and gas assets together with computer equipment, motor vehicles and
other equipment and are carried at cost, less any accumulated depreciation and accumulated impairment losses. Cost includes purchase
price and construction costs for qualifying assets, together with borrowing costs where applicable, in accordance with the Group’s
accounting policy. Depreciation of these assets commences when the assets are ready for their intended use.
Oil and gas assets
Exploration, evaluation and development expenditure is accounted for under the ‘successful efforts’ method. The successful efforts
method means that only costs which relate directly to the discovery and development of specific oil and gas reserves are capitalised.
93
JKX Oil & Gas plc Annual Report 2017
Exploration and evaluation costs are valued at costs less accumulated impairment losses and capitalised within intangible assets.
Development expenditure on producing assets is accounted for in accordance with IAS 16, ‘Property, plant and equipment’. Costs
incurred prior to obtaining legal rights to explore are expensed immediately to the income statement.
All lease and licence acquisition costs, geological and geophysical costs and other direct costs of exploration, evaluation and
development are capitalised as intangible assets or property plant and equipment according to their nature. Intangible assets are not
amortised and comprise costs relating to the exploration and evaluation of properties which the Directors consider to be unevaluated
until reserves are appraised as commercial, at which time they are transferred to property plant and equipment following an
impairment review and are depreciated accordingly. Where properties are appraised to have no commercial value, the associated costs
are treated as an impairment loss in the period in which the determination is made.
Costs related to hydrocarbon production activities are depreciated on a field by field unit of production method based on commercial
proved plus probable reserves of the production licence, except in the case of assets whose useful life differs from the lifetime of the
field, which are depreciated on a straight-line basis over their anticipated useful life of up to 10 years.
The calculation of the ‘unit of production’ depreciation takes account of estimated future development costs and is based on current
period end unescalated price levels. The ‘unit of production’ rate is set at the beginning of each accounting period. Changes in reserves
and cost estimates are recognised prospectively.
Other assets
Depreciation is charged so as to write off the cost, less estimated residual value, over their estimated useful lives, using the straight-
line method, for the following classes of assets:
Motor vehicles
- 4 years
Computer equipment
- 3 years
Other equipment
- 5 to 10 years
The estimated useful lives of property plant and equipment and their residual values are reviewed on an annual basis and, if necessary,
changes in useful lives are accounted for prospectively. Assets under construction are not subject to depreciation until the date on
which the Group makes them available for use.
The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the
carrying amount of the asset and is recognised in the income statement for the relevant period.
Business combinations
The acquisition of subsidiaries is accounted for using the purchase method. The cost of the acquisition is measured at the aggregate of
the fair values, at the date of exchange, of assets given, liabilities incurred or assumed and equity instruments issued by the Group in
exchange for control of the acquiree. The acquiree’s identifiable assets, liabilities and contingent liabilities that meet the criteria for
recognition under IFRS 3 (revised) are recognised at their fair value at the acquisition date. In a business combination achieved in
stages, the previously held equity interest in the acquiree is re-measured at its acquisition date fair value and the resulting gain or loss,
if any, is recognised in the income statement. Acquisition costs are expensed.
Goodwill is recognised as an asset and is initially measured at cost being the excess of the cost of the business combination over the
Group’s share in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities. After initial recognition,
goodwill is measured at cost less any accumulated impairment losses. Goodwill impairment reviews are undertaken annually or more
frequently if events or changes in circumstances indicate a potential impairment. Impairment losses on goodwill are not reversed.
On disposal of a subsidiary or joint arrangement, the attributable amount of unamortised goodwill, which has not been subject to
impairment, is included in the determination of the profit or loss on disposal.
Impairment of property, plant and equipment and intangible assets
Whenever events or changes in circumstances indicate that the carrying amount may not be recoverable, the Group reviews the
carrying amounts of its property, plant and equipment and intangible assets to determine whether there is any indication that those
assets have suffered an impairment loss. Individual assets are grouped together as a cash-generating unit for impairment assessment
purposes at the lowest level at which their identifiable cash flows, that are largely independent of the cash flows of the other Groups
assets, can be determined.
If any such indication of impairment exists the Group makes an estimate of its recoverable amount.
The recoverable amount is the higher of fair value less costs of disposal and value in use. Where the carrying amount of an individual
asset or a cash-generating unit exceeds its recoverable amount, the asset/cash-generating unit is considered impaired and is written
down to its recoverable amount. Fair value less costs of disposal is determined by discounting the post-tax cash flows expected to be
generated by the cash-generating unit, net of associated selling costs, and takes into account assumptions market participants would
use in estimating fair value. In assessing the value in use, the estimated future cash flows are adjusted for the risks specific to the
asset/cash-generating unit and are discounted to their present value that reflects the current market indicators.
Where an impairment loss subsequently reverses, the carrying amount of the asset/cash-generating unit is increased to the revised
estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have
94
JKX Oil & Gas plc Annual Report 2017
GROUP FINANCIAL STATEMENTS
Notes to consolidated financial statements
been determined had no impairment loss been recognised for the asset (cash-generating unit) in prior years. A reversal of an
impairment loss is recognised as income immediately.
JKX Employee Benefit Trust
The JKX Employee Benefit Trust was established in 2014 to hold ordinary shares purchased to satisfy various new share scheme
awards made to the employees of the Company which will be transferred to the members of the scheme on their respective vesting
dates subject to satisfying the performance conditions of each scheme.
The trust has been consolidated in the Group financial statements in accordance with IFRS 10.
Financial instruments
Financial assets and financial liabilities are recognised in the consolidated statement of financial position when the Group becomes
party to the contractual provisions of the instrument.
Convertible bonds due 2020 – embedded derivative
The net proceeds received from the issue of convertible bonds at the date of issue have been split between two elements: the host debt
instrument classified as a financial liability in Borrowings, and the embedded derivative.
The fair value of the embedded derivative has been calculated first and the residual value is assigned to the host debt liability. The
difference between the proceeds of issue of the convertible bonds and the fair value assigned to the embedded derivative, representing
the value of the host debt instrument, is included as Borrowings and is not remeasured. The host debt component is then carried at
amortised cost and the fair value of the embedded derivative is determined at inception and at each reporting date with the fair value
changes being recognised in profit or loss.
Issue costs are apportioned between the host debt element (included in Borrowings) and the derivative component of the convertible
bond based on their relative carrying amounts at the date of issue.
The interest expense on the component included in Borrowings is calculated by applying the effective interest method, with interest
recognised on an effective yield basis.
Upon redemption of convertible bonds by the Company in the market, the difference between the repurchase cost and the total of the
carrying amount of the liability plus the repurchased embedded option to convert is recorded in the income statement. 2016 gain on the
repurchase of convertible bonds (see Note 21) had been recognised in the income statement under Finance income in the year ended 31
December 2016.
Borrowings
Borrowings are initially measured at fair value, net of transaction costs and are subsequently measured at amortised cost using the
effective interest method, with interest expense recognised on an effective yield basis. The effective interest method is a method of
calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period.
The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial
liability, or, where appropriate, a shorter period.
Trade and other receivables
Trade and other receivables are recognised initially at fair value and are subsequently measured at amortised cost, reduced by any
provision for impairment. A provision for impairment of trade receivables is established when there is objective evidence that the
Group will not be able to collect all amounts due. Indicators of impairment would include financial difficulties of the debtor, likelihood
of the debtor’s insolvency, default in payment or a significant deterioration in credit worthiness. Any impairment is recognised in the
income statement within ‘Administrative expenses’.
Cash and cash equivalents
Cash and cash equivalents comprise cash in hand and current balances with banks and similar institutions, which are readily
convertible to known amounts of cash. Cash equivalents are short-term with an original maturity of less than 3 months.
Restricted cash
Restricted cash is disclosed separately on the face of the statement of financial position and denoted as restricted when it is not under
the exclusive control of the Group.
Trade and other payables
Trade and other payables are initially measured at fair value, and are subsequently measured at amortised cost, using the effective
interest rate method if the time value of money is significant.
Financial liabilities and equity
Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An
equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. Equity
instruments issued by the Company are recorded at the proceeds received net of direct issue costs.
Inventories
Inventory is comprised of produced oil and gas or certain materials and equipment that are acquired for future use. The oil and gas is
valued at the lower of average production cost and net realisable value; the materials and equipment inventory is valued at purchase
cost. Cost comprises direct materials and, where applicable, direct labour costs plus attributable overheads based on a normal level of
95
JKX Oil & Gas plc Annual Report 2017
activity and other costs associated in bringing the inventories to their present location and condition. Cost is calculated using the
weighted average method. Net realisable value represents the estimated selling price less all estimated costs of completion and costs to
be incurred in marketing, selling and distribution and any provisions for obsolescence.
Taxation
Income tax expense represents the sum of current tax payable and deferred tax.
The current tax payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income
statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items
that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or
substantively enacted by the reporting date.
Tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity or in other
comprehensive income, in which case the tax is also dealt with in equity or other comprehensive income respectively.
Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amount of assets and liabilities in the
financial statements and the corresponding tax base used in the computation of taxable profit. Deferred tax liabilities are generally
recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable
profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if
the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and
liabilities in a transaction that affects neither the tax profit nor the accounting profit.
Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries, and interests in joint
ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary
difference will not reverse in the foreseeable future.
The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable
that sufficient taxable profit will be available to allow all or part of the asset to be recovered. Any such reduction shall be reversed to
the extent that it becomes probable that sufficient taxable profit will be available.
Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset realised
based on tax rates and laws substantively enacted by the reporting date. Deferred tax assets and liabilities are offset when there exists
a legal and enforceable right to offset and they relate to income taxes levied by the same taxation authority and the Group intends to
settle its current tax assets and liabilities on a net basis.
Segmental reporting
Operating segments are reported in a manner consistent with the internal reporting provided to the Chief Operating Decision Maker.
The Chief Operating Decision Maker, who is responsible for allocating resources and assessing performance of the operating segments,
has been identified as the Executive Directors of the Group that make the strategic decisions.
Pension obligations
The liability recognised in the balance sheet in respect of defined benefit pension plans is the present value of the defined benefit
obligation at the end of the reporting period. The defined benefit obligation is calculated annually by an independent actuary using the
projected unit credit method.
The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest
rates of government bonds that are denominated in the currency in which the benefits will be paid (hryvnia), and that have terms
approximating to the terms of the related obligation. Currently, there is no sufficiently developed market of bonds denominated in
hryvnia with a sufficiently long period of repayment which would be consistent with an estimated period of payment of all benefits. In
such cases the Standard allows using current market rates to discount respective short-term payments and calculating the discount
rate for long-term liabilities by extending the current market rates along the yield curve.
The current service cost of the defined benefit plan, recognised in the Income Statement, except where included in the cost of an asset,
reflects the increase in the defined benefit obligation resulting from employee service in the current year, benefit changes
curtailments and settlements. Past-service costs are recognised immediately in the Income Statement.
The net interest cost is calculated by applying the discount rate to the net balance of the defined benefit obligation. This cost is
included in employee benefit expense in the statement of profit or loss.
Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are charged or credited to equity
in other comprehensive income in the period in which they arise.
Share options
The group operates a number of equity-settled, share-based compensation plans, under which the Company receives services from
Executive Directors and Senior Management as consideration for equity instruments (options) of the group. The fair value of the
services received from Executive Directors and Senior Management in exchange for the grant of the options is recognised as an
expense. The total amount to be expensed is determined by reference to the fair value of the options granted:
including any market performance conditions; (for example, the Company's share price);
excluding the impact of any service and non-market performance vesting conditions (for example, profitability, sales growth targets
and remaining an employee of the entity over a specified time period); and
96
JKX Oil & Gas plc Annual Report 2017
GROUP FINANCIAL STATEMENTS
Notes to consolidated financial statements
including the impact of any non-vesting conditions (for example, the requirement for employees to save).
Non-market performance and service conditions are included in assumptions about the number of options that are expected to vest.
The total expense is recognised over the vesting period, which is the period over which all of the specified vesting conditions are to be
satisfied.
In addition, in some circumstances employees may provide services in advance of the grant date and therefore the grant date fair value
is estimated for the purposes of recognising the expense during the period between service commencement period and grant date.
At the end of each reporting period, the group revises its estimates of the number of options that are expected to vest based on the non-
market vesting conditions. It recognises the impact of the revision to original estimates, if any, in the income statement, with a
corresponding adjustment to equity.
When the options are exercised, the company issues new shares or shares held by the JKX Employee Benefit Trust. The proceeds
received net of any directly attributable transaction costs are credited to share capital (nominal value) and share premium.
The grant by the Company of options over its equity instruments to the employees of subsidiary undertakings in the group is treated as
a capital contribution. The fair value of employee services received, measured by reference to the grant date fair value, is recognised
over the vesting period as an increase to investment in subsidiary undertakings, with a corresponding credit to equity in the parent
entity financial statements.
The social security contributions payable in connection with the grant of the share options is considered an integral part of the grant
itself, and the change will be treated as a cash-settled transaction.
The rules regarding the scheme are described in the Remuneration Report on pages 61 and 73 and in Note 26 on share based payments.
Bonus scheme
The Group operates a bonus scheme for its Directors and employees. The scheme has three performance conditions: 1. financial
objectives; 2. key strategic objectives and 3. safety performance conditions. The bonus payments are made annually, normally in
January of each year and the costs are accrued in the period to which they relate.
Pension costs
The Group contributes to the individual pension scheme of the qualifying employees’ choice. Contributions are charged to the income
statement as they become payable. The Group has no further payment obligations once the contributions have been paid.
Decommissioning
Provision is made for the cost of decommissioning assets at the time when the obligation to decommission arises. Such provision
represents the estimated discounted liability for costs which are expected to be incurred in removing production facilities and site
restoration at the end of the producing life of each field. A corresponding item of property plant and equipment is also created at an
amount equal to the provision. This is subsequently depreciated as part of the capital costs of the production facilities. Any change in
the present value of the estimated expenditure attributable to changes in the estimates of the cash flow or the current estimate of the
discount rate used are reflected as an adjustment to the provision and the property plant and equipment. The unwinding of the
discount is recognised as a finance cost.
Provisions
Provisions are created where the Group has a present obligation as a result of a past event, where it is probable that it will result in an
outflow of economic benefits to settle the obligation, and where it can be reliably measured. Provision for onerous lease is recognised
when the net cash outflows exceed the expected benefits to be received under the lease.
Provisions are measured at the best estimate of the expenditure required to settle the obligation at the balance sheet date, and are
discounted to present value where the effect is material. The amounts provided are based on the Group’s best estimate of the likely
committed outflow.
Revenue recognition
Sales of oil and gas products are recognised when the significant risks and rewards of ownership have passed to the buyer and it can be
reliably measured. This generally occurs when the product is physically transferred into a vessel, pipe or other delivery mechanism.
Revenue from other services are recognised when the services have been performed. Revenue is measured at the fair value of the
consideration received, excluding discounts, rebates, value added tax (“VAT”) and other sales taxes or duty.
Revenue resulting from the production of oil and natural gas from properties in which the Group has an interest with other producers
is recognised on the basis of the Group’s working interest (entitlement method). Gains and losses on derivative contracts are reported
on a net basis in the consolidated income statement.
Interest income is recognised as the interest accrues, by reference to the net carrying amount at the effective interest rate applicable.
Share capital and treasury shares
Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares are recognised as a
deduction from share premium, net of any tax effects. When share capital recognised as equity is repurchased, the amount of the
consideration paid, which includes directly attributable costs, net of any tax effects, is recognised as a deduction from share premium.
97
JKX Oil & Gas plc Annual Report 2017
Repurchased JKX Oil & Gas plc shares are classified as treasury shares in shareholders’ equity and are presented in the reserve for own
shares. The consideration paid, including any directly attributable incremental costs is deducted from equity attributable to the
Company’s equity holders until the shares are cancelled or reissued.
When treasury shares are sold or reissued subsequently, the amount received is recognised as an increase in equity, and the resulting
surplus or deficit on the transaction is presented in share premium. No gain or loss is recognised in the financial statements on the
purchase, sale, issue or cancellation of treasury shares.
Leasing
Rentals payable under operating leases are charged to the income statement on a straight-line basis over the term of the relevant lease.
Under operating leases, the risks and rewards of ownership are retained by the lessor. The Group has no finance leases.
Dividends
Interim dividends are recognised when they are paid to the Company’s shareholders. Final dividends are recognised when they are
approved by shareholders.
Exceptional items
Exceptional items comprise items of income and expense, including tax items, that are material either because of their size or their
nature and unlikely to recur and which merit separate disclosure in order to provide an understanding of the Group’s underlying
financial performance. Examples of events giving rise to the disclosure of material items of income and expense as exceptional items
include, but are not limited to, impairment events, disposals of operations or individual assets, litigation claims by or against the Group
and the restructuring of components of the Group’s operations. See Notes 5 and 19 for further details.
Critical accounting estimates and assumptions
The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom
equal the related actual results. The estimates and assumptions that have a risk of causing material adjustment to the carrying
amounts of assets and liabilities within the next financial year are discussed below.
a) Recoverability of oil and gas assets and intangible oil and gas costs (Note 5)
Costs capitalised as oil and gas assets in property, plant and equipment, and intangible assets are assessed for impairment when
circumstances suggest that the carrying value may exceed its recoverable value. As part of this assessment, management has carried
out an impairment test (ceiling test) on the oil and gas assets classified as property, plant and equipment, where indicators of
impairment have been identified on a CGU. This test compares the carrying value of the assets at the reporting date with the expected
discounted cash flows from each project prepared under the fair value less cost of disposal approach. For the discounted cash flows to
be calculated, management has used a production profile based on its best estimate of proven and probable reserves of the assets and a
range of assumptions, including an internal oil and gas price profile benchmarked to mean analysts’ consensus and a discount rate
which, taking into account other assumptions used in the calculation, management considers to be reflective of the risks. This
assessment involves judgement as to (i) the likely commerciality of the asset, (ii) proven, probable (‘2P’) reserves which are estimated
using standard recognised evaluation techniques (iii) future revenues and estimated development costs pertaining to the asset, (iv) the
discount rate to be applied for the purposes of deriving a recoverable value and (v) the value ascribed to contingent resources
associated with the asset.
b) Carrying value of intangible exploration and evaluation expenditure (Note 5 (b))
The carrying value for intangible exploration and evaluation assets represent the costs of active exploration projects the
commerciality of which is unevaluated until reserves can be appraised. Where a project is sufficiently advanced the recoverability of
intangible exploration assets is assessed by comparing the carrying value to estimates of the present value of projects. The present
values of intangible exploration assets are inherently judgemental. Exploration and evaluation costs will be written off to the income
statement unless commercial reserves are established or the determination process is not completed and there are no indications of
impairment. The outcome of ongoing exploration, and therefore whether the carrying value of exploration and evaluation assets will
ultimately be recovered, is inherently uncertain.
c) Depreciation of oil and gas assets (Note 5 ((a))
Oil and gas assets held in property, plant and equipment are mainly depreciated on a unit of production basis at a rate calculated by
reference to proved plus probable reserves and incorporating the estimated future cost of developing and extracting those reserves.
Future development costs are estimated using assumptions as to the numbers of wells required to produce those reserves, the cost of
the wells, future production facilities and operating costs; together with assumptions on oil and gas realisations.
d) Taxation (Notes 27 and 28)
Tax provisions are recognised when it is considered probable that there will be a future outflow of funds to the tax authorities. In this
case, provision is made for the amount that is expected to be settled. The provision is updated at each reporting date by management by
interpretation and application of known local tax laws with the assistance of established legal, tax and accounting advisors. These
interpretations can change over time depending on precedent set and circumstances in addition new laws can come into effect which
can conflict with others and, therefore, are subject to varying interpretations and changes which may be applied retrospectively. A
change in estimate of the likelihood of a future outflow or in the expected amount to be settled would result in a charge or credit to
income in the period in which the change occurs.
Tax provisions are based on enacted or substantively enacted laws. To the extent that these change there would be a charge or credit to
income both in the period of charge, which would include any impact on cumulative provisions, and in future periods.
98
JKX Oil & Gas plc Annual Report 2017
GROUP FINANCIAL STATEMENTS
Notes to consolidated financial statements
Deferred tax assets are recognised only to the extent it is considered probable that those assets will be recoverable. This involves an
assessment of when those deferred tax assets are likely to reverse, and a judgement as to whether or not there will be sufficient
taxable profits available to offset the tax assets when they do reverse. This requires assumptions regarding future profitability and is
therefore inherently uncertain. To the extent assumptions regarding future profitability change, there can be an increase or decrease
in the level of deferred tax assets recognised that can result in a charge or credit in the period in which the change occurs.
4. Segmental analysis
The Group has one single class of business, being the exploration for, evaluation, development and production of oil and gas reserves.
Accordingly the reportable operating segments are determined by the geographical location of the assets.
There are four (2016: four) reportable operating segments which are based on the internal reports provided to the Chief Operating
Decision Maker (‘CODM’). Ukraine and Russia segments are involved with production and exploration; the ‘Rest of World’ are involved
in exploration, development and production and the UK includes the head office and purchases material, capital assets and services on
behalf of other segments. The ‘Rest of World’ segment comprises operations in Hungary and Slovakia.
Transfer prices between segments are set on an arm’s length basis in a manner similar to transactions with third parties. Segment
revenue, segment expense and segment results include transfers between segments. Those transfers are eliminated on consolidation.
Segment results and assets include items directly attributable to the segment. Segment assets consist primarily of property, plant and
equipment, inventories and receivables. Capital expenditures comprise additions to property, plant and equipment and intangible
assets.
99
JKX Oil & Gas plc Annual Report 2017
2017
External revenue
Revenue by location of asset:
– Oil
– Gas
– Liquefied petroleum gas
– Management services/other
Inter segment revenue:
– Management services/other
Total revenue
Loss before tax:
UK
$000
Ukraine
$000
Russia
$000
Rest of
World
$000
Sub Total
$000
Eliminations
$000
Total
$000
-
-
-
33
33
16,458
636
174
17,268
35,835
16,998
1,630
54,463
4,607
50
-
15
-
-
4,607
98
56,950
17,649
1,804
76,436
-
-
-
-
-
17,268
54,463
4,607
98
76,436
11,020
11,020
-
-
-
-
-
-
11,020
(11,020)
11,020
(11,020)
-
-
11,053
56,950
17,649
1,804
87,456
(11,020)
76,436
Loss from operations
(1,911)
3,733
(2,692)
(12,255)
(13,125)
(103)
(13,228)
Finance income
Finance cost
Fair value movement on derivative liability
Assets
348
(3,164)
(3)
-
-
-
348
(3,164)
(3)
(15,944)
(103)
(16,047)
Property, plant and equipment
268
90,024
102,961
778
194,031
Intangible assets
Other receivable
Deferred tax
Inventories
Trade and other receivables
Restricted cash
-
-
-
-
572
269
-
-
-
3,136
-
-
-
3,136
7,536
11,293
2,011
20,840
2,497
1,528
-
3,327
2,004
-
558
-
865
228
468
5,824
4,969
497
6,929
Cash and cash equivalents
2,762
3,141
Total assets
Total liabilities
3,871
104,726
123,279
4,350
236,226
(18,227)
(56,732)
(9,313)
(6,045)
(90,317)
Non cash expense (other than depreciation
and impairment)
Exceptional item - reversal of provision for
impairment of Ukrainian oil and gas assets
Exceptional item - provision for
impairment of oil and gas assets
Exceptional Item - write off of exploration
and appraisal costs
Exceptional item – write off of appraisal
expenditure in Ukraine
Exceptional item – production based taxes
Exceptional items - other
Increase in property, plant and equipment
and intangible assets
Depreciation, depletion and amortisation
1,513
203
116
80
-
36
-
-
-
-
-
5,636
-
-
9,391
4,357
-
-
-
-
-
-
-
-
-
116
5,636
2,755
2,755
8,695
8,695
-
-
-
9,391
4,357
1,513
12,688
5,771
660
19,322
12,139
5,173
-
17,428
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
194,031
-
3,136
20,840
5,824
4,969
497
6,929
236,226
(90,317)
116
5,636
2,755
8,695
9,391
4,357
1,513
19,322
17,428
100
JKX Oil & Gas plc Annual Report 2017
GROUP FINANCIAL STATEMENTS
Notes to consolidated financial statements
2016
External revenue
Revenue by location of asset:
– Oil
– Gas
– Liquefied petroleum gas
– Management services/other
Inter segment revenue:
– Management services/other
Total revenue
Loss before tax:
UK
$000
Ukraine
$000
Russia
$000
Rest of
World
$000
Sub Total
$000
Eliminations
$000
Total
$000
-
-
-
-
-
15,092
665
35,945
18,343
3,776
23
-
4
54,836
19,012
9,168
9,168
9,168
-
-
-
-
54,836
19,012
-
-
-
-
-
-
-
-
15,757
54,288
3,776
27
73,848
-
-
-
-
-
15,757
54,288
3,776
27
73,848
9,168
9,168
(9,168)
(9,168)
-
-
83,016
(9,168)
73,848
Loss from operations
(11,083)
(18,984)
(741)
(3,807)
(34,615)
(139)
(34,754)
Finance income
Finance cost
Fair value movement on derivative liability
Assets
1,836
(4,636)
(599)
-
-
-
1,836
(4,636)
(599)
(38,014)
(139)
(38,153)
Property, plant and equipment
204
93,010
97,894
3,402
194,510
Intangible assets
Other receivable
Deferred tax
Inventories
Trade and other receivables
Restricted cash
-
-
-
-
914
-
-
-
-
7,706
3,277
-
7,706
3,277
3,556
12,578
2,590
18,724
1,884
338
-
2,701
2,621
-
-
301
201
542
4,585
4,174
201
14,067
Cash and cash equivalents
6,146
5,480
1,899
Total assets
Total liabilities
7,264
104,268
120,970
14,742
247,244
(22,677)
(55,093)
(7,453)
(5,188)
(90,411)
Non cash expense (other than depreciation
and impairment)
Exceptional item - provision for
impairment of oil and gas assets
Exceptional item – production based taxes
Exceptional item – administrative
expenses
Increase in property, plant and equipment
and intangible assets
-
-
-
-
-
24,340
4,454
-
265
257
522
-
-
-
2,000
2,000
-
30
24,340
4,484
10
4,051
250
1,339
5,650
Depreciation, depletion and amortisation
381
12,028
7,355
-
19,764
Major customers
Russia
There is one customer in Russia that exceeds 10% of the Group’s total revenues (2016: one in Russia).
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
194,510
7,706
3,277
18,724
4,585
4,174
201
14,067
247,244
(90,411)
522
2,000
24,340
4,484
5,650
19,764
2016
$000
2017
$000
16,964
19,008
101
JKX Oil & Gas plc Annual Report 2017
5. Property, plant and equipment and Intangible assets
5.(a) Property, plant and equipment
2017
Group
Cost
Oil and gas assets
Oil and gas
fields
Ukraine
$000
Gas field
Russia
$000
Oil and gas
fields
Hungary
$000
Other assets
$000
Total
$000
At 1 January
Additions during the year
Foreign exchange equity adjustment
Disposal of property, plant and equipment
564,023
213,181
36,971
18,296
832,471
3,172
-
-
5,756
12,088
(876)
471
-
-
344
117
9,743
12,205
(500)
(1,376)
At 31 December
567,195
230,149
37,442
18,257
853,043
Accumulated depreciation, depletion and
amortisation and provision for impairment
At 1 January
471,013
115,293
34,687
16,968
637,961
Depreciation on disposals of property, plant and
equipment
Exceptional item - reversal of provision for
impairment of Ukrainian oil and gas assets
Exceptional item – provision for impairment of oil
and gas assets in Hungary
Foreign exchange equity adjustment
Depreciation charge for the year
At 31 December
Carrying amount
At 1 January
At 31 December
-
(24)
(5,636)
-
-
11,794
-
-
6,957
4,962
-
-
2,755
-
-
(487)
(511)
-
-
58
672
(5,636)
2,755
7,015
17,428
477,171
127,188
37,442
17,211
659,012
93,010
90,024
97,888
102,961
2,284
-
1,328
1,046
194,510
194,031
Oil and gas fields in Ukraine and Russia include $2.6m and $4.8m respectively relating to items under construction (2016: nil).
102
JKX Oil & Gas plc Annual Report 2017
GROUP FINANCIAL STATEMENTS
Notes to consolidated financial statements
2016
Group
Cost
Oil and gas assets
Oil and gas
fields
Ukraine
$000
Gas field
Russia
$000
Oil and gas
fields
Hungary
$000
Other assets
$000
Total
$000
At 1 January
Additions during the year
Foreign exchange equity adjustment
560,186
177,469
3,947
84
-
35,770
36,289
1,249
-
20,315
794,259
277
240
5,557
36,010
Disposal of property, plant and equipment
(110)
(142)
(567)
(2,536)
(3,355)
At 31 December
564,023
213,181
36,971
18,296
832,471
Accumulated depreciation, depletion and
amortisation and provision for impairment
At 1 January
459,551
89,291
32,687
18,081
599,610
Depreciation on disposals of property, plant and
equipment
Exceptional item – provision for impairment of oil
and gas assets
Foreign exchange equity adjustment
Depreciation charge for the year
At 31 December
Carrying amount
At 1 January
At 31 December
(110)
(54)
-
(2,265)
(2,429)
-
-
11,572
-
2,000
18,837
7,219
-
-
-
179
973
2,000
19,016
19,764
471,013
115,293
34,687
16,968
637,961
100,635
93,010
88,178
97,888
3,602
2,284
2,234
1,328
194,649
194,510
Exceptional item – provision for impairment of oil and gas assets
During 2016 and 2017 impairment triggers were noted in respect of our oil and gas assets in Ukraine, Russia and Hungary. Full
impairment disclosures for each of the impairment tests are made in the Note 5 (c).
103
JKX Oil & Gas plc Annual Report 2017
5.(b) Intangible assets: exploration and evaluation expenditure
2017
Group
Cost:
At 1 January
Additions during the year
Exceptional item – write off of appraisal expenditure in Ukraine
Effect of exchange rates on intangible assets
At 31 December
Provision against oil and gas assets
At 1 January
Exceptional item - Impairment of Hungarian and Slovakian assets
At 31 December
Carrying amount
At 1 January
At 31 December
2016
Group
Cost:
At 1 January
Additions during the year
Effect of exchange rates on intangible assets
At 31 December
Provision against oil and gas assets
At 1 January and 31 December
Carrying amount
At 1 January
At 31 December
Ukraine
$000
Hungary
Rest of World
$000
$000
Total
$000
1,308
9,391
(9,391)
-
1,308
1,308
-
1,308
-
-
814
13,247
-
-
-
190
-
799
15,369
9,581
(9,391)
799
814
14,236
16,358
-
814
814
814
-
6,355
7,881
7,663
8,695
14,236
16,358
6,892
-
7,706
-
Ukraine
$000
Hungary
$000
Rest of World
$000
Total
$000
1,308
814
13,353
15,475
-
-
-
-
90
(196)
90
(196)
1,308
814
13,247
15,369
1,308
-
6,355
7,663
-
-
814
814
6,998
6,892
7,812
7,706
Exceptional item – write off of appraisal expenditure in Ukraine and provision for impairment of intangible assets
Full details are provided in the Note 5 (d).
5.(c) Impairment test for property, plant and equipment
A review was undertaken at the reporting date of the carrying amounts of property, plant and equipment to determine whether there
was any indication of a trigger that may have led to these assets suffering an impairment loss. Following this review impairment
triggers were noted in relation to the Ukrainian, Russian and the Hungarian assets.
As there is no readily available market for the Group’s oil and gas properties, fair value is derived as the net present value of the
estimated future cash flows arising from the continued use of the assets, incorporating assumptions that a typical market participant
would take into account.
The value in use of an oil and gas property is generally lower than its Fair Value Less Costs of Disposal (‘FVLCD’) as value in use reflects
only those cash flows expected to be derived from the asset in its current condition. FVLCD includes appraisal and development
expenditure that a market participant would consider likely to enhance the productive capacity of an asset and optimise future cash
flows. Consequently, the Group determines recoverable amount based on FVLCD using a Discounted Cash Flow (‘DCF’) methodology.
The DCF was derived by estimating discounted after tax cash flows for each CGU based on estimates that a typical market participant
would use in valuing such assets.
104
JKX Oil & Gas plc Annual Report 2017
GROUP FINANCIAL STATEMENTS
Notes to consolidated financial statements
The impairment tests compared the recoverable amount of the respective CGUs noted below to the respective carrying values of their
associated assets. The estimates of FVLCD meet the definition of level three fair value measurements as they are determined from
unobservable inputs.
Impairment test for the Ukrainian oil and gas assets
The latest reserve estimates for the Novomykolaivske Complex included a significant downwards revision from 29.1 MMboe to 23.3
MMboe which constituted an impairment trigger. In addition, a review was also undertaken for the Elyzavetivske filed where
performance through 2017 was significantly better than expected.
Poltava Petroleum Company (‘PPC’), a wholly owned subsidiary of JKX, holds 100% interest in five production licences (Ignativske,
Movchanivske, Rudenkivske, Novomykolaivske, Elyzavetivske) and one exploration licence (Zaplavska) in the Poltava region of
Ukraine.
The Ignativske, Movchanivske, Rudenkivske, Novomykolaivske production licences contain one or more distinct fields which, together
with the Zaplavska exploration licence, form the Novomykolaivske Complex (‘NNC’).
The Elyzavetivske production licence is located 45km from the Novomykolaivske Complex and has its own gas production facilities.
Ukrainian Cash Generating Units (‘CGUs’)
In respect of the Group’s Ukraine assets the NNC forms a single CGU as these contain oil and gas fields which are serviced by a single
processing facility and do not have separately identifiable cash inflows. In addition they have commonality of facilities, personnel and
services.
The Elyzavetivske licence also has its own separate processing facilities and separately identifiable cash flows and therefore is a
distinct CGU for the purpose of the impairment test. During 2015 an extension to the Elyzavetivske production licence was awarded to
PPC which included the West Mashivska field. Due to the proximity of the West Mashivska field to the Elyzavetivske plant, production
will be tied back to the Elyzavetivske processing facilities and therefore forms part of this CGU.
In accordance with IAS 36, the impairment review was undertaken in US$ being the currency in which future cash flows from NNC and
Elyzavetivske will be generated.
Key Assumptions – NNC and Elyzavetivske
The key assumptions used in the impairment testing were:
Production profiles: these were based on the latest available information assessed internally. Such information included 2P reserves
for NNC and Elyzavetivske of 21.8 MMboe and 1.6 MMboe, respectively.
Economic life of field: it was assumed that the title to the licences is retained and that the NNC licence term will be successfully
extended beyond its current 2024 expiration date through to the economic life of the field (expected to be around 2031). The
economic life of the Elyzavetivske field is currently expected to be around 2023.
Gas prices: during 2015 Ukraine acquired the ability to purchase gas from Europe rather than being completely dependent on Russia
for imports. As such, Ukrainian gas prices are expected to be more aligned with European gas prices in future but also influenced by
Russian-Ukrainian border price and international oil prices. The gas price used for 2018 is based on current and forecast gas prices
realised by PPC. For the following ten years a forward gas price curve was used with gas prices remaining constant thereafter.
Oil prices: the Company used a forward price curve for the next ten years and remaining constant thereafter.
Production taxes: the Company has assumed production tax rates of 29% for gas and oil. A gas tax rate of 12% is applied to new wells.
Capital and operating costs: these were based on current operating and capital costs in Ukraine for both projects. Estimates were
provided by third parties and supported by estimates from our own specialists, where necessary.
Post tax nominal discount rate of 19.2%. This was based on a Capital Asset Pricing Model analysis consistent with that used in
previous impairment reviews.
Based on the key assumptions set out above:
the recoverable amount of NNC’s oil and gas assets ($117.2m) exceeds its carrying amount ($83.9) by $33.3m and therefore NNC’s oil
and gas assets were not impaired.
Elyzavetivske’s recoverable amount (including the West Mashivska extension) ($12.3) exceeds its carrying amount ($0.5) by $11.8m,
and therefore a reversal has been made, as explained in more detail below.
Elyzavetivske impairment reversal
During 2014 the Elyzavetivske field was impaired by $12.8m after significant erosion of the headroom from 2013. The main driver of
the impairment was the reduction in reserves. Had this impairment not been made, then the carrying value of Elyzavetivske would
have been $6.1m as at 31 December 2017. Therefore, a reversal of $5.6m has been recognised.
105
JKX Oil & Gas plc Annual Report 2017
Sensitivity analysis for the NNC and Elyzavetivske
Any impairment is dependent on judgement used in determining the most appropriate basis for the assumptions and estimates made by
management, particularly in relation to the key assumptions described above. Sensitivity analysis to likely and potential changes in
key assumptions has therefore been provided below.
The impact on the impairment calculation of applying different assumptions to gas prices, production volumes, production tax rates,
future capital expenditure and post-tax discount rates, all other inputs remaining equal, would be as follows:
Impact if gas price:
increased by 20%
reduced by 20%
Impact if gas production volumes:
increased by 10%
decreased by 10%
Impact if future capital expenditure:
increased by 20%
decreased by 20%
Impact if post-tax discount rate:
increased by 2 percentage points to 21.2%
decreased by 2 percentage points to 17.2%
NNC
Increase/(decrease) in
headroom of $33.3m for
NNC CGU
$m
Elyzavetivske
Increase/(decrease) in
headroom of $11.8m
for Elyzavetivske CGU
$m
38.6
(38.6)
19.3
(19.3)
(18.5)
18.5
(10.5)
10.5
5.8
(5.9)
2.9
(2.9)
(0.5)
0.5
(0.4)
0.3
Impairment test for Yuzhgazenergie LLC (‘YGE’), Russia
Following the 2007 acquisition of YGE in Russia, a technical and environmental re-evaluation of YGE’s Koshekhablskoye gas field
redevelopment was undertaken by the Group. The re-evaluation resulted in a revised development plan and production profile. The
development plan and production profile have continued to be refined since that time.
During 2017 YGE experienced delays in its workover of Well 5 that was not successfully completed. This was considered significant
enough to trigger an impairment review.
In accordance with IAS 36, the impairment review has been undertaken in Russian Roubles, which is the functional currency of YGE.
Key Assumptions – YGE
The key assumptions used in the impairment testing were:
Production profiles: these were based on the latest available information assessed internally. Such information included 2P reserves
for YGE of 71.7 MMboe.
Economic life of field: it was assumed that YGE will be successful in extending the licence term beyond its current 2026 expiration to
the economic life of the field (expected to be around 2048). The discounted cash flow methodology used has not taken account of any
opportunities that may exist to extract reserves in a shorter timeframe by investing to increase the current plant capacity.
Gas prices: from 1 July 2018 and annually thereafter, the gas prices have been increased by 3.9% through to 2021, and estimated
Russian inflation of 4.0% thereafter.
Capital and operating costs: these were based on current operating and capital costs in Russia, project estimates provided by third
parties and supported by estimates from our own specialists, where necessary.
Post tax nominal Rouble discount rate of 11.5%. This was based on a Capital Asset Pricing Model analysis consistent with that used in
previous impairment reviews.
Based on the key assumptions set out above YGE’s recoverable amount ($115.3m) exceeds it carrying amount ($100.8m) by $14.5m and
therefore YGE’s Koshekhablskoye gas field was not impaired.
Any impairment is dependent on judgement used in determining the most appropriate basis for the assumptions and estimates made by
management, particularly in relation to the key assumptions described above. Sensitivity analysis to likely and potential changes in
key assumptions has therefore been reviewed below.
106
JKX Oil & Gas plc Annual Report 2017
GROUP FINANCIAL STATEMENTS
Notes to consolidated financial statements
The impact on the impairment calculation of applying different assumptions to gas prices, production, future capital expenditure and
post-tax discount rates, all other inputs remaining equal, would be as follows:
Sensitivity Analysis
Increase/(decrease) in headroom of $14.5m for
Yuzhgazenergie CGU
$m
Impact of Adygean gas price:
growth rates increased by 10% annually
growth rates reduced by 10% annually
Impact of production volumes:
Increased by 10%
Decreased by 10%
Impact of future capital expenditure:
Increased by 20%
Decreased by 20%
Impact of post-tax discount rate:
Increased by 1 percentage point to 12.5%
Decreased by 1 percentage point to 10.5%
11.4
(11.4)
27.3
(27.3)
(10.5)
10.5
(9.9)
11.1
Impairment test for Hungarian oil and gas assets
Hungarian property plant and equipment – Folyópart Energia Kft (‘FEN’)
The Company now holds a 100% interest in six development licences (Mining Plots) through its wholly owned Hungarian subsidiary,
Folyópart Energia Kft.
In December 2016, well Hn-2ST (sidetrack) was successfully completed on the Hajdunanas IV Mining Plot (HMP). This was the first
drilling operation completed since JKX assumed operatorship in November 2014. The Hn-2ST (sidetrack) did not encounter any
productive oil horizons, which had been included in the pre-drill estimates of contingent resources. In October 2017 workover of well
Hn-1 was completed however actual results were lower than expected. The results from the Hn-2ST (sidetrack) and Hn-1 therefore
constituted an impairment trigger and a full impairment review was completed in respect of HMP.
Hungarian Cash Generating Unit (‘CGUs’)
HMP forms a single CGU which is serviced by a single processing facility and commonality of facilities, personnel and services. In
accordance with IAS 36, the impairment review for HMP has been undertaken in US$ being the currency in which future cash flows
from HMP will be generated.
Key Assumptions – HMP
The key assumptions used in the impairment testing in 2017 were:
Production profiles: these were based on the latest available test and production data from the recent production from Hn-1 and
internal assessment. The Company included internally assessed 2P reserves of 0.04 MMboe;
Oil and gas prices: these were based on current prices being realised and short term price curves derived from expectations in the
Hungarian oil and gas market.
Capital and operating costs: these were based on project estimates provided by third parties and the partner and operator of our
Hungarian assets.
The post tax discount rate of 10% was applied based on a Capital Asset Pricing Model analysis for the Group’s Hungarian assets.
Based on the key assumptions set out above HMP’s carrying amount of nil exceeded its recoverable amount by $2.8m and therefore
HMP’s assets were impaired to nil due to the reduction in the estimated recoverable oil and gas volumes from this field.
5.(d) Appraisal expenditure written off and impairment test for intangible assets
Exceptional item – appraisal expenditure written off
After the well stimulation programme to target contingent resources in the Northern part of Rudenkivske two of the wells were
abandoned due to lack of gas production. Other wells are only expected to produce insignificant quantities of gas. The total amount of
written off expenditure is $9.4m.
Impairment of Hungarian exploration and evaluation expenditure
The Tiszavasvári-IV Mining Plot contains the Tiszavasvári-6 discovery well (‘TZ-6’), which, due to the early stage of appraisal, is
classified as an exploration and appraisal asset and recognised within intangible assets.
In 2017, the absence of a firm work programme at year end to develop the Hungarian reserves constituted an impairment trigger and
accordingly an impairment test was undertaken. At year end there were no further exploration or evaluation planned or budgeted.
There is no clear indication that FVLCD is greater than zero and the assets were impaired in full by $0.8m.
107
JKX Oil & Gas plc Annual Report 2017
Impairment of Slovakian exploration and evaluation expenditure
During 2017 there was no progress with the exploration licenses in Slovakia and at year end there were no further exploration or
evaluation planned or budgeted. There is no clear indication that FVLCD is greater than zero and the assets were impaired in full by
$7.9m.
6. Other receivable
Other receivables consist of VAT recoverable as a result of expenditures incurred in Russia. The receivable is expected to be recovered
between two and five years (2016: two and five years).
7. Investments
The net book value of unlisted investments comprises:
Cost
At 1 January and 31 December
Accumulated impairment
At 1 January and 31 December
Carrying amount
At 31 December
2017
$000
2016
$000
5,617
5,617
5,617
5,617
-
-
Full provision was made against investments in 2007 which comprise an investment in a Ukrainian oil and gas company. At the end of
2007 there were no clear development plans relating to the investment and this continues to be the position at 31 December 2017. The
investment reflects a 10% holding of the Company’s ordinary share capital.
8. Inventories
Warehouse inventory and materials
Oil and gas inventory
2017
$000
4,441
1,383
5,824
2016
$000
3,095
1,490
4,585
During the year obsolete inventories of $0.6m were written off to profit and loss under ‘cost of sales’ at Poltava Petroleum Company
(‘PPC’), our wholly owned subsidiary in Ukraine.
9. Trade and other receivables
Trade receivables
Less: provision for impairment of trade receivables
Trade receivables – net
Other receivables
VAT receivable
Prepayments
2017
$000
3,348
(505)
2,843
508
469
1,149
4,969
2016
$000
2,657
(550)
2,107
1,019
337
711
4,174
As of 31 December 2017, trade and other receivables of $0.5m (2016: $0.6m) were past due and impaired. The amount of the provision
was $0.5m (2016: $0.6m). The impaired receivable relates to a single gas customer, which is 18 months past due. Legal proceedings
were initiated at the end of 2016 and are currently ongoing in order to recover the amount outstanding.
As of 31 December 2017, trade and other receivables of $2.8m (2016: $2.1m) were neither past due nor impaired. There is no difference
between the carrying value of trade and other receivables and their fair value.
108
JKX Oil & Gas plc Annual Report 2017
GROUP FINANCIAL STATEMENTS
Notes to consolidated financial statements
The carrying amounts of the Group’s trade and other receivables are denominated in the following currencies:
US Dollar
Sterling
Euros
Hungarian Forints
Ukrainian Hryvnia
Russian Roubles
10. Cash and cash equivalents
Cash
Short term deposits
Cash and cash equivalents
Restricted cash
Total
2017
$000
137
17
487
44
776
1,890
3,351
2017
$000
4,958
1,971
6,929
497
7,426
2016
$000
204
69
131
-
182
2,540
3,126
2016
$000
8,874
5,193
14,067
201
14,268
Short term deposits comprise amounts which are held on deposit, but are readily convertible to cash.
Restricted cash
Included in Restricted cash is $0.2m (2016: $0.2m) held in Hungary at K & H Bank Zrt, which is deposited in accordance with the
Hungarian Mining Act to cover potential compensation for any land damage and the costs of recultivation, including environmental
damage of the waste management facilities. The other $0.3m (2016: nil) relates to funds received by the Trustees of the JKX Death in
Services scheme pending distribution to the beneficiaries.
11. Trade and other payables
Trade payables
Other payables
Other taxes and social security costs
VAT payable
Accruals
12. Borrowings
Current
Convertible bonds due 2020 (2016: 2018) 1
Term-loans repayable within one year
Non-Current
Convertible bonds due 2020 (2016: 2018)
Term-loans repayable after more than one year
2017
$000
2,828
2,209
2,166
1,121
4,044
2016
$000
2,562
2,759
2,265
956
6,553
12,368
15,095
2017
$000
7,630
7,630
9,003
9,003
2016
$000
16,795
16,795
-
-
1. At 31 December 2017 current liabilities included $7.6m, out of which $6.9m is due to be repaid on 19 February 2018, and represents $5.3m in respect of Bond principal, $0.5m in
respect of prior accretion amounts and $1.1m is Bond interest payment; $0.7m is due to be repaid on 19 August 2018 and represents Bond interest payment.
109
JKX Oil & Gas plc Annual Report 2017
Convertible bonds due 2020 (2016: 2018)
On 19 February 2013 the Company successfully completed the placing of $40m of guaranteed unsubordinated convertible bonds with
institutional investors which were due 2018 (prior to restructuring) raising cash of $37.2m net of issue costs.
Prior to restructuring the Bonds had an annual coupon of 8 per cent per annum payable semi-annually in arrears.
The Bonds are convertible into ordinary shares of the Company at any time from 1 April 2013 up until seven days prior to their
maturity on 19 February 2020 (2018 prior to restructuring) at a conversion price of 76.29 pence per Ordinary Share, unless the
Company settles the conversion notice by paying the Bondholder the Cash Alternative Amount (see below).
Convertible bonds restructured on 3 January 2017
On 3 January 2017 a special resolution was approved by Bondholders to change the terms and conditions of the Bonds. The main
amendments to the terms and conditions of the Bonds were as follows:
the Bondholder's option to require redemption of all of the outstanding Bonds on 19 February 2017 was deleted;
the final maturity date of the Bonds was extended to 19 February 2020, with the outstanding principal amount of the Bonds being
repaid in three instalments; 33% on 19 February 2018; 33 % on 19 February 2019; and 34% on the 19 February 2020;
the coupon rate of the Bonds was increased from 8% to 14%;
the covenant which limited new borrowings by the Company was removed; and
the Company were to make two payments to Bondholders in respect of prior accretion amounts, on 19 February 2017 and on 19
February 2018 of 12.0% and 3.0%, respectively, of the principal amount of the Bonds.
19 February 2017 the Company made the first payment to Bondholders of $1.9m, 12.0% of the principal amount of the Bonds, in
respect of prior accretion amounts and in accordance with the terms and conditions of the Bond. On 19 February 2018 the Company
made a payment of the first instalment to Bondholders of $5.3m (33% of the principal amount of the Bonds), together with final
accretion payment of $0.5m (3.0% of the principal amount of the Bonds) and $1.1m interest payment in accordance with the terms and
conditions of the Bond.
The revised terms and conditions of the Bond was considered to be a modification and therefore the difference in the amortised cost
carrying amount at the modification date was recognised through a change in the effective interest rate at the modification date
through to the end of the revised estimated term of the Bond. Interest, after the deduction of issue costs is charged to the income
statement using an effective rate of 17.3% (18.0% prior to restructuring).
There is therefore no impact of the restructuring of the Bond on the Consolidated Income Statement in 2017.
The impact of the amendments to the Bond on the Consolidated Statement of Financial Position was to decrease the carrying amount of
the total Bond liability of $18.1m (at 31 December 2016, includes the associated derivative) by $0.7m, which will be amortised over the
estimated remaining life of the modified Bond.
In accordance with IFRS 9, following a modification or renegotiation of a financial liability that does not result in de-recognition, the
Group is required to recognise any modification gain or loss immediately in profit or loss. Any gain or loss is determined by
recalculating the gross carrying amount of the financial liability by discounting the new contractual cash flows using the original
effective interest rate. The difference between the original contractual cash flows of the Bond and the modified cash flows discounted
at the original effective interest rate is trivial and hence there will be no impact on adoption of IFRS 9 on 1 January 2018.
Cash Alternative Amount
At the option of the Company, the conversion notice in respect of the Bonds can be settled in cash rather than shares, the Cash Alternative
Amount payable is based on the Volume Weighted Average Price of the Company’s shares prior to the conversion notice.
Convertible bonds repurchased and cancelled – 2016 information
On 19 February 2016, in accordance with the terms and conditions of the Bonds, the Company repurchased 50 bonds with a total principal
amount of $10m. In June, September and October 2016, the Company repurchased and subsequently cancelled a total of 50 Bonds with par
value of $10m resulting in $1.1m gain on redemption, which has been included in Finance income for the year year ended 31 December
2016 (see Group Annual Return for the year ended 31 December 2016, Note 21). The remaining principal amount of outstanding Bonds at
31 December 2016 was $16.0m. There were no Bonds repurchases during 2017.
Credit facility
On 15 December 2017, PPC, our subsidiary in Ukraine, has secured a 12 month revolving credit line from Tascombank for UAH150 million.
At 31 December 2017 the total short-term line of credit amounted to $5.3m at an exchange rate of $1: 28.07 Hryvnia. The amount
outstanding at 31December 2017 was nil, so the undrawn portion totaled $5.3m. The facility will be available through 14
December 2018.
The main terms and conditions of the revolving credit line are as follows:
drawdowns can be made either in USD or UAH;
interest rate cost for USD drawn down is 10%;
interest rate cost for UAH drawn down: 17.5% to 30 days, 18.0% 31 to 90 days, 20.75% 91 to 180 days, 22.5% 181 to 365 days;
borrowing above UAH90m, equivalent to $3.2m at 31 December 2017 will require a corporate guarantee from JKX Oil & Gas Plc;
110
JKX Oil & Gas plc Annual Report 2017
GROUP FINANCIAL STATEMENTS
Notes to consolidated financial statements
assets with a market value of UAH355m, equivalent to $12.6m at 31 December 2017 have been identified for use as a collateral,
collateral is to be provided only on drawdown;
amount borrowed will be repaid during the last 4 months, by equal-sized monthly payments, to be effected on the last day of the
month/the last day of the credit limit period.
The credit facility of $5.3m includes two financial covenants:
to keep gross margin at no less than 50% during the period of the credit facility agreement, based on PPC’s financial reporting
results;
starting from the first quarter of 2018 and during the period of the credit facility agreement, PPC is to maintain the following ratio
as per the financial reporting: ratio between financial (interest) debt and EBITDA (adjusted to the annual value) at no more than 3.0.
13. Derivatives
Current derivative financial instruments
At the beginning of the year
Reclassification to/from non-current derivative financial instruments
At the end of the year
Non-current derivative financial instruments
At the beginning of the year
Reclassification from/to current derivative financial instruments
Full/partial settlement of derivative liability
Fair value loss movement during the year
At the end of the year
2017
$000
1,341
(1,341)
-
-
1,341
(1,341)
3
3
2016
$000
-
1,341
1,341
2,171
(1,341)
(1,429)
599
-
Convertible bonds due 2020 – embedded derivatives
Bondholder Put Option– cancelled 3 January 2017
Bondholders had the right to require the Company to redeem the following number of Bonds on the following future dates together
with accrued and unpaid interest to (but excluding) such dates:
Redemption Date
19 February 2017
Maximum number of Bonds to be
redeemed
all outstanding Bonds
At 31 December 2016 current liabilities included $16.8m in respect of the put option available to bondholders on 19 February 2017. On
3 January 2017, this put option was cancelled as part of the Bond restructuring as detailed in Note 12. Bonds with a principal amount of
$10.0m were redeemed on 19 February 2016 in addition to an early redemption premium of $0.9m in accordance with the terms and
conditions of the bond.
Company Call Option
The Company can redeem the Bonds at any time in full but not in part at their principal amount plus one semi-annual coupon plus any
accrued interest. If the Bonds are called prior to 19 February 2020, the redemption price will also include an additional U.S. $6,000 per
Bond.
The Company can redeem the Bonds any time in full but not in part at their principal amount plus any accrued interest if the aggregate
principal amount of the Bonds outstanding is less than 15% of the aggregate principal amount originally issued.
Fixed exchange rate
The Sterling-US Dollar exchange rate is fixed at £1/$1.5809 for the conversion and other features.
14. Financial instruments
Fair values of financial assets and financial liabilities - Group
Set out below is a comparison by category of carrying amounts and fair values of the Group’s financial instruments. Fair value is the
amount at which a financial instrument could be exchanged in an arm’s length transaction. Where available, market values have been
used (this excludes short term assets and liabilities).
111
JKX Oil & Gas plc Annual Report 2017
Financial assets
Cash and cash equivalents and restricted cash (Note 10) – classified as
loans and receivables
Trade receivables (Note 9) – classified as loans and receivables
Other receivables (Note 9) – classified as loans and receivables
Financial liabilities
Trade payables (Note 11) - carried at amortised cost
Other payables (Note 11) - carried at amortised cost
Accruals (Note 11) - carried at amortised cost
Borrowings – convertible bonds due 2020 (2016: 2018)
(Note 12) - carried at amortised cost (current)
Borrowings – convertible bonds due 2020 (2016: 2018)
(Note 12) - carried at amortised cost (non-current)
Derivatives – fair value through profit or loss (Note 13)
Book Value
2017
$000
Fair Value
2017
$000
Book Value
2016
$000
Fair Value
2016
$000
7,426
2,843
508
2,828
2,209
2,262
7,630
7,426
2,843
508
2,828
2,209
2,262
6,486
14,268
14,268
2,107
1,019
2,562
2,759
2,351
2,107
1,019
2,562
2,759
2,351
16,795
15,955
9,003
7,653
-
-
3
3
1,341
1,341
Financial liabilities measured at amortised cost are carried at $23.9m (2016: $24.5m). The Group’s borrowings at 31 December 2017
relate entirely to the convertible bonds due 2020 (31 December 2016: 2018).
Fair value hierarchy
Derivatives
At the year end the Group’s derivative financial instrument related to embedded derivative within the convertible bonds due 2020
(2016: 2018) (Note 13). The value of the derivative was calculated at inception using the Monte Carlo simulation methodology and
subsequently using the Black-Scholes formula, and the Company’s historic share price and volatility, treasury rates and other
estimations. As it was derived from inputs that are not from observable market data it was grouped into level 3 within the fair value
measurement hierarchy.
The main assumptions used in valuation of the derivative conversion option as at 31 December 2017 were:
underlying share price of: £0.11 (2016: £0.3025);
£/US$ spot rate of 1.3513 (2016: £1/$1.2340 );
historic volatility of 56.29% (2016: 53.42%);
risk free rate based on the maturity which is 2.14 year US Treasury rate of 1.874%, 1.14 year US Treasury rate of 1.831% and 0.14
year US Treasury rate of 1.302% (continuously compounded). At 31 December 2016 risk free rate was based on 1.14 years US
Treasury rate of 0.956%.
A 10% increase/decrease in Company’s historic share price volatility would have resulted in an increase in the fair value loss for the
year of $0.01m and a decrease in the fair value loss that would bring derivative’s fair value to nil (2016: increase in the fair value loss
for the year of $0.04m, decrease in the fair value loss of $0.02m, respectively), assuming that all other variables remain constant.
Credit risk - Group
The Group has policies in place to ensure that sales of products are made to customers with appropriate credit worthiness. The Group
limits credit risk by assessing creditworthiness of potential counterparties before entering into transactions with them and continuing
to evaluate their creditworthiness after transactions have been initiated. Where appropriate, the use of prepayment for product sales
limits the exposure to credit risk. There is no difference between the carrying amount of trade and other receivables and the maximum
credit risk exposure.
The maximum financial exposure due to credit risk on the Group’s financial assets, representing the sum of cash and cash equivalents,
trade receivables and other current assets, as at 31 December 2017 was $10.8m (2016: $17.4m).
Capital management – Group
The Directors determine the appropriate capital structure of the Group specifically, how much is raised from shareholders (equity) and
how much is borrowed from financial institutions (debt) in order to finance the Group’s business strategy.
The Group’s policy as to the level of equity capital and reserves is to ensure that it maintains a strong financial position and low gearing
ratio which provides financial flexibility to continue as a going concern and to maximise shareholder value. The capital structure of the
Group consists of shareholders’ equity together with net debt. The Group’s funding requirements are met through a combination of
debt, equity and operational cash flow.
112
JKX Oil & Gas plc Annual Report 2017
GROUP FINANCIAL STATEMENTS
Notes to consolidated financial statements
Net debt
Net debt comprises: borrowings disclosed in Note 12 and total cash in Note 10 and excludes derivatives. Equity attributable to the
shareholders of the Company comprises issued capital, other reserves and retained earnings (see Consolidated statement of changes in
equity).
The capital structure of the Group is as follows:
Convertible bonds due 2020 (2016: 2018) (current and non-current, Note 12)
(16,633)
(16,795)
2017
$000
2016
$000
Total cash (Note 10)
Net debt
Total shareholders’ equity
7,426
14,268
(9,207)
(2,527)
145,909
156,833
Following the issue of $40m of convertible bonds in February 2013, the primary capital risk to the Group is the level of indebtedness.
The convertible bond included a financial covenant which limited the Group’s indebtedness (excluding the bonds themselves) in respect
of any new borrowings (in addition to the bond amount) to three times 12-month free cash flow based on the most recently published
consolidated financial statements. During 2016 the Group has complied with this financial covenant. On 3 January 2017 this
indebtedness covenant was cancelled as part of the Bond restructuring as detailed in Note 12.
Liquidity risk - Group
The treasury function is responsible for liquidity, funding and settlement management under policies approved by the Board of
Directors. Liquidity needs are monitored using regular forecasting of operational cash flows and financing commitments. The Group
maintains a mixture of cash and cash equivalents and committed facilities in order to ensure sufficient funding for business
requirements.
Significant restrictions
Temporary capital controls were established by the National Bank of Ukraine (‘NBU’) on 1 December 2014 in an attempt by the
Ukrainian government to safeguard the economy and protect foreign exchange reserves in the short term.
On 4 March 2015 a number of new NBU Resolutions were implemented with immediate effect (NBU No. 160 dated 3 March 2015;
Resolution of the NBU No. 161 dated 3 March 2015; Resolution of the NBU No. 154 dated 2 March 2015).
The Resolutions extended the currency control restrictions implemented in Ukraine on 1 December 2014 and introduced additional
measures which have the impact of restricting the remittance of funds to foreign investors under certain conditions and bans the
transfer of Hryvnia to purchase Ukrainian Government bonds.
The restrictions were effective until 8 June 2016 but have subsequently been eased by the NBU resolution No. 342 on 9 June 2016. The
resolution enabled the repatriation of dividends from JKX’s Ukrainian subsidiary for the years 2014 and 2015. NBU issued the
Resolution No.33 on 13 April 2017 which enabled the repatriation of dividends for 2016.
Prior to the easing of restrictions, Cash and short-term deposits held in Ukraine were subject to local exchange control regulations
which restricted exporting capital from Ukraine. Following the easing of these restrictions, no cash or short term deposits included
within this consolidated financial information is restricted.
The following tables set out details of the expected contractual maturity of non-derivative financial liabilities. The tables include both
interest and principal cash flows on an undiscounted basis. To the extent that interest flows are floating rate, the undiscounted amount
is derived from interest rate curves at the reporting date.
The maturity analysis for financial liabilities was as follows:
Group - 31 December 2017
Maturity of financial liabilities
Trade payables (Note 11)
Other payables (Note 11)
Accruals (Note 11)
Borrowings – Convertible bonds due 2020
Within 3
months
$000
3 months
- 1year
$000
1-2 years
$000
2-3 years
$000
2,828
2,209
2,262
6,880
-
-
-
-
-
-
-
-
-
750
6,411
5,821
113
JKX Oil & Gas plc Annual Report 2017
Group - 31 December 2016
Maturity of financial liabilities
Trade payables (Note 11)
Other payables (Note 11)
Accruals (Note 11)
Borrowings – Convertible bonds due 20181
1Prior to restructuring of the bonds on 3 January 2017. See Note 12.
Within 3
months
$000
2,562
2,759
2,351
16,795
Interest rate risk profile of financial assets and liabilities - Group
Fixed rate interest is charged on the Group’s convertible bond (see Note 12). The interest rate profile of the other financial assets and
liabilities of the Group as at 31 December is as follows (excluding short-term assets and liabilities, non-interest bearing):
Group – 31 December
Floating rate
Short term deposits (Note 10)
Other receivables (Note 9)
Other payables (Note 11)
2017
2016
Within 1 Year
$000
Within 1 Year
$000
1,971
508
2,209
5,193
1,019
2,759
Floating rate financial assets comprise cash deposits placed on money markets at call, seven day and monthly rates.
Interest rate sensitivity - Group
The sensitivity analysis below has been determined based on the exposure to interest rates on our short term deposits at the reporting
date.
If interest rates had been 1 per cent higher/lower and all other variables were held constant, the Group’s loss after tax and net assets
for the year ended 31 December 2017 would increase/decrease by $28,150 (2016: $28,000). 1 per cent is the sensitivity rate used as it
best represents management’s assessment of the possible change in interest rates that could apply to the Group.
Foreign currency exposures - Group
The table below shows the extent to which the Group has monetary assets and liabilities in currencies other than the functional
currency of the operating company involved. These exposures give rise to the net currency gains and losses recognised in the income
statement.
As at 31 December the asset/(liability) foreign currency exposures were:
US Dollar
Sterling
Euros
Hungarian Forints
Ukrainian Hryvnia
Bulgarian Leva
Russian Roubles
Canadian Dollar
Total net
2017
$000
1
(451)
464
130
1,263
50
6
1
2016
$000
1
77
(642)
72
2,732
43
24
1
1,464
2,308
Foreign currency sensitivity - Group
The Group is mainly exposed to the currency fluctuations of Ukraine (Hryvnia), Russia (Rouble) and UK (Sterling). The sensitivity
analysis principally arises on money market deposits and working capital items held at the reporting date.
The following table details the Group’s sensitivity to a 5 per cent (2016: 20 per cent) increase and decrease in the US Dollar against
Sterling and against Hryvnia and Rouble (2016: 20 per cent against Hryvnia and Rouble), all other variables were held constant. Due to
the significant foreign currency fluctuation in the UK, Ukraine and Russia 5 per cent has been used to calculate sensitivity for Sterling,
Hryvnia and Rouble. 5 per cent (2016: 20 per cent) is the sensitivity rate that best represents management’s assessment of the possible
114
JKX Oil & Gas plc Annual Report 2017
GROUP FINANCIAL STATEMENTS
Notes to consolidated financial statements
change in the foreign exchange rates affecting the Group. A positive number below indicates an increase in profit and equity when the
US Dollar weakens against the relevant currency. For a strengthening of the US Dollar against the relevant currency, there would be an
equal and opposite impact on the profit and other equity, and the balances below would be negative.
Profit/(loss) for the year and Equity
5 per cent strengthening of the US Dollar/ (2016: 20 per
cent)
5 per cent weakening of the US Dollar/(2016: 20 per
cent)
Hryvnia
2017
$000
Hryvnia
2016
$000
Rouble
2017
$000
Rouble
2016
$000
Sterling
2017
$000
Sterling
2016
$000
(60)
(455)
60
455
-
-
(4)
4
21
(21)
(13)
13
Commodity risk and sensitivity - Group
The Group’s earnings are exposed to the effect of fluctuations in oil, gas and condensate prices and the risks relating to their
fluctuation in are discussed on page 38, together with the discussion of financial risk factors. The Group’s oil, gas and condensate is sold
to local trading companies through market related contracts.
The Group is a price taker and does not enter into commodity hedge agreements unless required for borrowing purposes which may
occur from time to time. Therefore no sensitivity analysis has been prepared on the exposure to oil, gas or condensate prices for
outstanding monetary items at the 31 December 2017 as there is no impact on any outstanding amounts.
15. JKX Employee Benefit Trust
In 2013, JKX Employee Benefit Trust was established and acquired 5,000,000 of shares in JKX Oil & Gas plc at a cost of $4.0m for
the purpose of making awards under the Group’s employee share schemes and these shares have been classified in the statement
of financial position as treasury shares within equity.
None of these shares were used in 2017 (2016: nil) to settle share options, therefore at the year end JKX Employee Benefit Trust
held 5,000,000 shares in JKX Oil & Gas plc (2016: 5,000,000).
115
JKX Oil & Gas plc Annual Report 2017
16. Share capital
Equity share capital, denominated in Sterling, was as follows:
2017
Number
2017
£000
2017
$000
2016
Number
2016
£000
2016
$000
Authorised
Ordinary shares of 10p each
300,000,000
30,000
-
300,000,000
30,000
-
Allotted, called up and fully paid
Opening balance at 1 January
172,125,916
17,212
26,666
172,125,916
17,212
26,666
Exercise of share options
-
-
-
-
-
-
Closing balance at 31 December
172,125,916
17,212
26,666
172,125,916
17,212
26,666
Of which the following are shares held in treasury:
Treasury shares held at
1 January and 31 December
402,771
40
77
402,771
40
77
The Company did not purchase any treasury shares during 2017 (2016: none) and no treasury shares were used in 2017 (2016: none) to
settle share options. There are no shares reserved for issue under options or contracts. As at 31 December 2017 the market value of the
treasury shares held was $0.1m (2016: $0.2m).
17. Other reserves
At 1 January 2016
Exchange differences arising on translation of overseas
operations
Post-
employment
benefit
obligation
reserve
$000
Merger
reserve
$000
30,680
Capital
redemption
reserve
$000
Foreign currency
translation
reserve
$000
587
(210,812)
-
-
19,634
At 31 December 2016
30,680
587
(191,178)
At 1 January 2017
30,680
587
(191,178)
Total
$000
(179,545)
19,634
(159,911)
(159,911)
7,118
-
-
-
-
-
Exchange differences arising on translation of overseas
operations
Remeasurement of post-employment benefit obligations
-
-
-
-
7,118
-
(333)
(333)
At 31 December 2017
30,680
587
(184,060)
(333)
(153,126)
Merger reserve was created on 30 May 1995 when JKX Oil & Gas plc acquired the issued share capital of JP Kenny Exploration &
Production Limited for the issue of ordinary shares and represents the difference between the fair value of consideration given for the
shares and the nominal value of those instruments.
Capital redemption reserve relates to the buyback of shares in 2002, there have been no additional share buy-backs since this time.
Foreign currency translation reserve includes movements that relate to the retranslation of the subsidiaries whose functional
currencies are not the US Dollar.
During 2017, the Russian Rouble (‘RR’) strengthened by approximately 5% (2016: strengthened by 17%) from RR60.66/$ to RR57.60/$
(2016: strengthened RR72.88/$ to RR60.66/$). A significant portion of the currency translation differences of US$7.1m (2016:
US$19.6m) included in the Consolidated statement of comprehensive income arose on the translation of property, plant and equipment
denominated in RR (see Note 5 (a)).
Post-employment benefit obligation reserve relates to a defined benefit pension plan in PPC, our subsidiary in Ukraine. Under the
Ukrainian legislation, employees who work in hazardous conditions have the right for an early retirement. PPC has jobs with hazardous
working conditions (hereinafter referred to as the “list II”) and participates in the government defined benefit plan. Upon early
retirement the pensioners are entitled to a pension which is financed by their employers until they enrolled into a regular pension
scheme financed by a Pension Fund of Ukraine. The early pension benefit (in the form of a monthly annuity) is payable by employers
only until the employee has reached the statutory retirement age (60 – for males and females). The right to pension emerges once a
116
JKX Oil & Gas plc Annual Report 2017
GROUP FINANCIAL STATEMENTS
Notes to consolidated financial statements
number of conditions pertaining to pension insurance service record and service record in hazardous jobs have been met and a certain
age has been reached. Once employees from the list II have reached 55 years of age, PPC would compensate to Pension Fund of Ukraine
pension obligation for the next 5 years on a monthly basis. The employer is responsible for 100% for “list II” categories of early
pensioners. Pensions are calculated using a formula based on the employee’s salary, pension insurance service record, and total length
of past service at specific types of workplaces (“list II” category) and, thus, the pension plan is a defined benefit plan by its nature.
18. Provisions
Current provisions
At 1 January 2017
Foreign currency translation
Amount released in the year
Amount utilised in the year
Amount provided in the year
At 31 December 2017
Onerous lease
provision (2)
$000
Production based
taxes (1)
$000
589
28
(31)
(468)
86
204
33,921
(1,213)
-
-
4,357
37,065
Total
$000
34,510
(1,185)
(31)
(468)
4,443
37,269
1. The provision for production based taxes, is in respect of a claim against PPC for additional rental fee for the period August to December 2010 and January to December 2015.
$4.4m was recognised as a charge in the 2017 Consolidated income statement and relates to interest accrued during 2017, out of which $1.1m relates to August to December
2010 liability and $3.3m to January to December 2015. Both claims are being contested in the Ukrainian courts (see Note 27). The amount is denominated in Ukrainian Hryvnia
(‘UAH’) and is stated above at its US$-equivalent amount using the 2017 year end rate of UAH28.07/$ (2016: UAH 27.19/$). The provision at 31 December 2017 includes the total
value of the claims plus interest and penalties. The Board believes that the claims are without merit under Ukrainian law and the Company will continue to contest it vigorously.
No contingent liabilities exist in respect of Ukrainian production taxes.
2. See Note 19 for details.
Non-current provisions
Provision for site restoration
At 1 January 2017
Foreign exchange adjustment
Revision in estimates
Unwinding of discount (Note 22)
At 31 December 2017
Ukraine
$000
Russia
$000
Hungary
$000
Total
$000
1,543
2,146
575
4,264
-
900
131
(115)
(84)
195
2,574
2,142
50
-
-
625
(65)
816
326
5,341
The provision in respect of Ukraine represents the present value of the well and site restoration costs that are expected to be incurred
up to 2034 (2016: 2034). The Russia provision results from the decommissioning of 12 wells (2016:12) and removal of plant as required
by the license obligation and is due to start from 2049 (2016: 2049). The provisions are made using the Group’s internal estimates that
management believe form a reasonable basis for the expected future costs of decommissioning.
19. Exceptional items
During the year, the exceptional items as detailed below have been included in administrative expenses in the income statement:
Exceptional item – onerous lease provision (1) (see Note 18)
Exceptional item – lease costs (2)
Exceptional item – remuneration and severance costs (3)
Exceptional item – legal costs (3)
2017
$000
(55)
-
2016
$000
(594)
(209)
(1,364)
(3,681)
(94)
-
(1,513)
(4,484)
1. 2017 onerous lease provision concerns the Group’s liability for onerous lease contracts relating to its London office. Following a reduction in London office staff in 2016, three
out of the four floors of the occupied building became surplus to requirements. Subsequently, two out of three floors have been assigned to new tenants. The provision has been
determined as the present value of the unavoidable costs relating to rents and rates to the end of the lease terms, net of the expected sub-lease income, discounted at 6.5%
(2016: 6%). The remaining life of the leases at 31 December 2017 was 4 years (2016: 5 years).
2. 2016 lease costs represented rent and rate costs for the 4 months to 31 December 2016 relating to three floors of the London office building.
3. $1.4 million of severance costs paid to two Executive Directors removed from the Board of Directors at the AGM on 30 June 2017 (2016: $2.5 million of severance costs and
additional remuneration which the previous Board approved and paid prior to the General Meeting on 28 January 2016. $0.5 million in relation to General Meeting and the
replacement of the Board on 28 January 2016. $0.7 million severance costs incurred as a result of staff reductions mainly at the Group’s London headquarters);
$0.1 million of professional advisory fees incurred in relation to the removal of two Executive Directors from the Board of Directors.
117
JKX Oil & Gas plc Annual Report 2017
20. Cost of sales
Operating costs
Depreciation, depletion and amortisation
Other production based taxes
Exceptional item – production based taxes (Note 18)
Exceptional item - reversal of provision for impairment of Ukrainian oil and gas assets (Note 5)
Exceptional item – provision for impairment of Hungary and Slovakia (Note 5)
Exceptional item – write off of appraisal expenditure in Ukraine (Note 5)
2017
$000
19,891
16,756
16,956
53,603
4,357
(5,636)
11,450
9,391
2016
$000
19,499
18,791
17,737
56,027
24,340
-
2,000
-
73,165
82,367
The cost of inventories (calculated by reference to production costs) expensed in cost of sales in 2017 was $2.0m (2016: $1.1m).
21. Finance income
Interest income on deposits
Gain on repurchase of Convertible bond
22. Finance costs
Borrowing costs
Unwinding of discount on site restoration (Note 18)
2017
$000
348
-
348
2017
$000
2,838
326
3,164
23. Loss from operations – analysis of costs by nature
Loss from operations derives solely from continuing operations and is stated after charging/(crediting) the following:
Depreciation – other assets (Note 5. (a))
Depreciation, depletion and amortisation – oil and gas assets (Note 5. (a))
Staff costs (net of $0.2m (2016: $0.3m) capitalised, Note 25)
Foreign exchange gain
Operating lease payments
- property lease rentals
- plant and equipment
2017
$000
672
16,756
14,368
1,424
817
2,225
2016
$000
753
1,083
1,836
2016
$000
4,377
259
4,636
2016
$000
973
18,791
17,828
431
826
1,797
118
JKX Oil & Gas plc Annual Report 2017
GROUP FINANCIAL STATEMENTS
Notes to consolidated financial statements
During the year the Group (including its overseas subsidiaries) obtained the following services from the Company’s auditors:
Audit of the parent company and consolidated financial statements
Fees payable to company’s auditors for other services:
- Audit of the Company’s subsidiaries
- Audit related assurance services
- Other non-audit services
2017
$000
288
198
101
41
628
2016
$000
276
186
109
70
641
24. Obligations under leases
At the reporting date, the Group’s aggregate future minimum commitments under non-cancellable operating leases are as follows:
Within one year
In the second to fifth years inclusive
2017
$000
428
932
1,360
2016
$000
442
1,276
1,718
Operating leases primarily relate to rentals payable by the Group for certain of its office premises and staff accommodation.
25. Staff costs
Wages and salaries
UK social security costs
Other pension costs
Share based payments (equity-settled) (Note 26)
2017
$000
2016
$000
14,145
17,226
300
210
(46)
453
401
48
14,609
18,128
Staff costs are shown gross and $0.2m (2016: $0.3m) was capitalized, representing time spent on exploration and development
activities.
During the year, the average monthly number of employees was:
Management/operational
Administration support
2017
Number
2016
Number
448
79
527
571
59
630
There are no Directors on service contracts included within management/operational (2016: 2). Further details of the Directors and
their remuneration are included on pages 61 to 73 which form part of these financial statements.
26. Share-based payments
Share options are granted to senior management based on performance criteria. The scheme rules are described in the Directors’
Remuneration Report. All share-based payments are equity settled.
According to the Plan that is currently in place, the Remuneration Committee has the ability to grant awards of nil-cost options
annually to senior management of the Group, conditional on the Group performance over a period of at least three years.
At 31 December 2017, there were outstanding options under Performance Share Plan (PSP) (2016: under various employee share option
schemes), exercisable during the years 2018 to 2026 (2016: 2017 to 2026), to acquire 1,059,650 (2016: 2,168,450) shares of the
Company at nil cost per share (2016: share price ranging from nil to £59.75p). The vesting period for 1,059,650 (2016: 2,168,450) of the
share options is 3 years, with an exercise period of 7 years making a 10 year maximum term.
119
JKX Oil & Gas plc Annual Report 2017
The following table illustrates the number and weighted average exercise prices (‘WAEP’) of, and movements in, share options during
the year.
Outstanding as at 1 January
Granted during the year
Lapsed or forfeited during the year
Outstanding at 31 December
Exercisable at 31 December
2017
Number
2017
WAEP
2016
Number
2,168,450
22.78p 12,740,100
-
-
711,250
(1,108,800)
44.55p (11,282,900)
1,059,650
0.00p
2,168,450
-
-
-
2016
WAEP
28.39p
0.00p
27.68p
22.78p
-
For the share options outstanding as at 31 December 2017, the weighted average remaining contractual life is 8.0 years (2016: 8.3
years). Weighted average exercise prices (‘WAEP’) of options outstanding at 31 December 2017 is nil (2016:22.78) due to lapse of
remaining DSOS awards granted in 2014 during the year, which had an exercise price of 59.75p.
During the year no share options were granted in accordance with the Performance Share Plan (‘PSP’), which was introduced in 2010.
And no share options were granted in accordance with the Discretionary Share Option Scheme (‘DSOS’). This schemes reflect the best
practice aspects recommended by the Association of British Insurers following the publication of their guidelines in March 2001 (the
‘ABI Guidelines’).
From 2015 onwards, grants under DSOS ceased in accordance with our policy.
Lapsed or forfeited Directors share options in 2016
On 28 January 2016, following a General Meeting of the Company, the service contracts of the four Executive Directors were
terminated with immediate effect. Prior to the General Meeting, the Board in place at that time approved and made payments of
£62,772 to forfeit 9,460,000 unexpired share options, which are included in the table above.
Share Option Scheme
DSOS
The DSOS is made up of two parts. Options to acquire ordinary shares in the Company granted under Part A are ‘Approved Options’ and
options to acquire Shares granted under Part B of the DSOS are ‘Unapproved Options’. No consideration shall be payable for the grant of
an Option.
No options were granted under the DSOS in 2017 (2016: nil). For DSOS options to vest there has to be an increase in the Group’s
Earnings Per Share (‘EPS’) growth over the performance period measured over the 3 consecutive calendar years commencing from the
date the options were granted. The weighted average fair value of options granted during the year under the DSOS was nil per option
(2016: nil).
PSP
PSP are granted to Executive Directors and senior management. Executive Directors and senior management receive awards under the
2010 Performance Share Plan in the form of nil cost options. No consideration is required to be paid for the grant or exercise of an
Option.
No share options were granted under PSP in 2017 (2016: 711,250). The PSP options provide a conditional right to acquire shares at nil
cost subject to the satisfaction of the performance conditions and continued employment with the Group. For these options to vest a
comparison is performed between the Group’s TSR against the FTSE Fledgling index (half the options) (2016: FTSE Fledgling index) and
the All-Share Oil & Gas Producers index (other half of options). The weighted average fair value of options granted during 2016 under
the PSP was 5.84p per option.
Fair value of share options granted
The fair value of options granted under the PSP in 2016 was estimated as at the date of the grant using a variant of the Monte Carlo
model, taking into account the terms and conditions upon which the options were granted, which includes the performance condition
related to the TSR directly. No dividends are paid on shares under the scheme prior to exercise.
The total share based payment credit for the year was $0.05m (2016: charge of $0.05m).
The following table lists the inputs to the model used for the options granted in the year ended 31 December 2016. The expected future
volatility has been determined by reference to the historical volatility.
120
JKX Oil & Gas plc Annual Report 2017
GROUP FINANCIAL STATEMENTS
Notes to consolidated financial statements
Dividend yield
Expected share price volatility
Risk free interest rate
Exercise price
Expected life of option (years)
Weighted average share price
Bonus scheme
The full details of the bonus performance criteria for Directors and senior employees and the bonus earned is explained in the
Remuneration Report on pages 61 to 73.
27. Taxation
Analysis of tax on loss
Current tax
UK - current tax
Overseas - current year
Current tax total
Deferred tax
Overseas – prior year
Overseas - current year
Deferred tax total
Total taxation
2017
$000
-
2,964
2,964
-
(1,348)
(1,348)
1,616
2016
PSP
0.0%
82%
0.6%
0.0p
3.0
19.3p
2016
$000
-
1,341
1,341
(1,767)
(612)
(2,379)
(1,038)
Factors that affect the total tax charge
The total tax charge for the year of $1.6m (2016: $1.0m credit) is higher (2016: higher) than the average rate of UK corporation tax of
19.25% (2016: 20%). The differences are explained below:
Total tax reconciliation
Loss before tax
Tax calculated at 19.25% (2016: 20.00%)
Other fixed asset differences
Net change in unrecognised losses carried forward
Differences relating to prior years
Permanent foreign exchange differences
Effect of tax rates in foreign jurisdictions
Rental fee provision
Other non-deductible expenses
De-recognition of prior year losses
Total tax charge/(credit)
2017
$000
2016
$000
(16,047)
(38,153)
(3,089)
(7,631)
2,709
-
913
354
(3,280)
2,642
1,367
1,616
3,485
(1,767)
3,327
271
3,211
191
(2,125)
(1,038)
The total tax charge for the year was $1.6m (2016: $1.0m credit) comprising a current tax charge of $3.0m (2016: $1.3m) in respect of
Ukraine, a deferred tax charge before exceptional items of $2.7m (2016: credit of $1.2m) and a deferred tax credit of $4.1m in respect
of exceptional items (2016: credit of $1.2m). The increase in current tax charge to $3.0m (2016: $1.3m) reflects higher profitability in
Ukraine. In Ukraine, the corporate tax rate for 2017 was 18% and remains at this level for 2018. The total deferred tax credit of $1.3m
(2016: $2.4m credit) comprises: a $5.4m credit mainly reflecting the recognition of deferred tax assets in respect of Ukrainian Rental
fee provision and impairment reversal for Elizavetovskoye field; and a net $4.1m charge (2016: $0.2m) relating to derecognition of
121
JKX Oil & Gas plc Annual Report 2017
deferred tax assets in respect of Hungarian tax losses brought forward and other tax timing differences on our oil and gas assets in
Russia and Hungary.
Taxes charged on production of hydrocarbons in Ukraine and Hungary are included in cost of sales (Note 20). The standard rate of
corporation tax in the UK changed from 20% to 19% with effect from 1 April 2017. Accordingly, the Company’s profits for this
accounting year are taxed at an effective rate of 19.25%.
Factors that may affect future tax charges
A significant proportion of the Group’s income will be generated overseas. Profits made overseas will not be able to be offset by costs
elsewhere in the Group. This could lead to a higher than expected tax rate for the Group.
Changes to the UK corporation tax rates were substantively enacted as part of Finance Bill 2015 and Finance Bill 2016. These include
reductions to the main rate to reduce the rate to 19% from 1 April 2017 and to 17% from 1 April 2020. The impact of the rate reduction
is not expected to have a material impact on UK current taxation.
The corporation tax rate in Ukraine for 2017 was 18% (2016: 18%).
Taxation in Ukraine – production taxes
Since Poltava Petroleum Company’s (‘PPC’s’) inception in 1994 the Company has operated in a regime where conflicting laws have
existed, including in relation to effective taxes on oil and gas production.
In order to avoid any confusion over the level of taxes due, in 1994, PPC entered into a licence agreement with the Ukrainian State
Committee on Geology and the Utilisation of Mineral Resources (‘the Licence Agreement’) which set out expressly in the Licence
Agreement that PPC would pay royalties on production at a rate of only 5.5% of sales value for the duration of the Licence Agreement.
Pursuant to the Licence Agreement, PPC was granted an exploration licence and four 20-year production licences, each in respect of a
particular field. In 2004, PPC’s production licences were renewed and extended until 2024, Subsoil Use Agreements were signed and
attached to the licences and operations continued as before.
The Company and PPC have continued to invest in Ukraine on the basis that PPC would pay a royalty on sales at a rate of 5.5%.
In December 1994, a new fee on the production of oil and gas (known as a ‘Rental Payment’ or ‘Rental Fee’) was introduced through
Ukrainian regulations. On 30 December 1995, JKX, together with its Ukrainian subsidiaries (including PPC), was issued with a Joint
Decision of the Ministry of Economy, the Ministry of Finance and the State Committee for the Oil and Gas (‘the Exemption Letter’),
which established a zero rent payment rate for oil and natural gas produced in Ukraine by PPC for the duration of the Licence
Agreement for Exploration and Exploitation of the Fields. Based on the Exemption Letter PPC did not expect to pay any Rental Fees.
Rental Fees paid since 2011
In 2011, new laws were enacted which established new mechanisms for the determination of the Rental Fee. Notwithstanding the
Exemption Letter, in January 2011 PPC began to pay the Rental Fee in order to avoid further issues with the Ukrainian authorities but
without prejudice to its right to challenge the validity of the demands.
Since 2011, the Rental Fees paid by PPC have amounted to more than $180 million. These charges have been recorded in cost of sales in
each of the accounting periods to which they relate.
International arbitration proceedings
In 2015, the Company and its wholly-owned Ukrainian and Dutch subsidiaries commenced arbitration proceedings against Ukraine
under the Energy Charter Treaty, the bilateral investment treaties between Ukraine and the United Kingdom and the Netherlands,
respectively. In these proceedings, the Company sought repayment of more than $180 million in Rental Fees that PPC paid on
production of oil and gas in Ukraine since 2011, in addition to damages to the business.
During 2015 Rental Fees in Ukraine were increased to 55% and capital control restrictions were introduced. On 14 January 2015, an
Emergency Arbitrator issued an Award ordering Ukraine not to collect Rental Fees from PPC in excess of 28% on gas produced by PPC,
pending the outcome of the application to a full tribunal for the Interim Award. On 23 July 2015 an international arbitration tribunal
issued an Interim Award requiring the Government of Ukraine to limit the collection of Rental Fees on gas produced by PPC to a rate of
28%.
The Interim Award was to remain in effect until final judgement is rendered on the main arbitration case, which was heard in early July
2016. A decision from the tribunal was awarded on 6 February 2017.
The tribunal ruled that Ukraine was found not to have violated its treaty obligations in respect of the levying of Rental Fees but
awarded the Company damages of $11.8 million plus interest, and costs of $0.3 million in relation to subsidiary claims.
In March 2017, Ukraine's Ministry of Justice filed a claim with the High Court of the United Kingdom naming JKX as a defendant in an
application seeking to set aside the arbitration award for damages against Ukraine and in favour of JKX.
In October 2017 the High Court of the United Kingdom, ordered that the application brought by Ukraine seeking to set aside the recent
Uncitral arbitration award against Ukraine and in favour of JKX be dismissed. The Government of Ukraine is therefore still liable to pay
to JKX the sum of USD11.8 million plus interest and costs of USD0.3 million in relation to subsidiary claims, as previously ordered. The
Judge also ordered that Ukraine should pay JKX's costs of $83,638.
122
JKX Oil & Gas plc Annual Report 2017
GROUP FINANCIAL STATEMENTS
Notes to consolidated financial statements
Rental Fee demands
The Group currently has two claims (2016: two) for additional Rental Fees being contested through the Ukrainian court process. These
arise from disputes over the amount of Rental Fees paid by PPC for certain periods since 2010 (2016: 2010), which in total amount to
approximately $37.1 million (2016: $33.9 million) (including interest and penalties), as detailed below. All amounts are being claimed in
Ukrainian Hryvnia (‘UAH’) and are stated below at their US$-equivalent amounts using the year end rate of $1:UAH28.07(2016: $1: UAH
27.2 ).
August – December 2010: approximately $11.3 million (2016: $10.6 million) (including $6.8 million (2016: $6.1 million) of interest
and penalties). On 11 March 2014 PPC won the case in the Poltava Court. The tax office appealed and the Kharkiv Appellate
Administrative Court reversed the earlier decision. PPC then lost an appeal in the High Administrative Court of Ukraine and the
Supreme Court rejected PPC’s application for the appeal. PPC has discovered that there were in fact certain procedures that were
not followed regarding the tax notifications that formed the basis of the original claims against PPC. Certain documentation was
found to be missing from the files of the tax authorities. In April 2017 the Poltava Circuit Administrative Court found in favour of
PPC and cancelled the tax notification decisions on the grounds that due process had not been followed. On 1 June 2017 the Kharkiv
Appellate Administrative Court upheld the judgment of the Poltava Circuit Administrative Court. The tax authorities filed a
cassation complaint. On 5 February 2018 the tax authorities’ appeal against the decision was dismissed.
January – December 2015: approximately $25.8 million (2016: $23.3 million) (including $11.2 million (2016: $10.8 million) of interest
and penalties). Following the commencement of international arbitration proceedings at the beginning of 2015 (see above), from July
2015 PPC reverted to paying a 28% Rental Fee for gas production (instead of the revised official rate of 55%) as a result of the
awards granted under the arbitration. PPC also declared part of its Rental Fee payments at 55% for the first 6 months of 2015 as
overpayments and consequently stopped paying the Rental Fee for gas in order to align the total payments made in 2015 with the
28% rate awarded made under the arbitration proceedings. The Ukrainian tax authorities have issued PPC with claims for the
difference between 28% and 55%. PPC is in the process of court hearings in respect of the claim, although the Company considers
such claims to be in direct violation of the Interim Award received from the arbitration tribunal, noted above. In addition, in April
2016, the tax authorities issued PPC with a separate demand for $0.1 million of penalties and interest on unpaid Rental Fees for the
period of August-October 2015. PPC also filed lawsuits against the tax authorities to cancel the application of such additional
penalties and interest.
Following the tribunal’s dismissal of the Company’s claim for overpayment of Rental Fees, an exceptional charge of $4.4 million has
been charged to the Consolidated income statement in the year (2016: $24.3 million) relating to interest accrued on the August –
December 2010 and January – December 2015 claims (see Note 18).
No adjustment has been made to recognise any possible future benefit to the Company that may result from the tribunal award in the
Company’s favour for damages of $11.8 million plus interest, and costs of $0.3 million since the award is still subject to enforcement
proceedings in the Ukrainian courts.
In 2015 there was a claim of approximately $6 million (including $3 million of interest and penalties) relating to the period January –
March 2007. During 2016 the Supreme Court of Ukraine ruled in favour of the Company in respect of this claim and a second parallel
case related to this claim was won by PPC with the High Administration Court of Ukraine. As such no provision is recorded in respect of
this claim, and the Group considers the case closed.
28. Deferred tax
Provided deferred taxation – Net
Fixed asset differences
Other temporary differences
Tax losses
Net deferred tax asset
/(liability)recognized
Assets
Liabilities
Net
2017
$000
5,111
9,982
5,747
2016
$000
7,696
5,396
5,632
2017
$000
2016
$000
2017
$000
2016
$000
(14,922)
(14,537)
(9,811)
(6,841)
-
-
-
-
9,982
5,747
5,918
5,396
5,632
4,187
20,840
18,724
(14,922)
(14,537)
A net deferred tax asset of $5.9m (2016: $4.2m-asset) arises as a result of PPC's activities $2.8m net liability (2016: $8.2m net liability),
Yuzhgazenergie LLC's activities $11.3m net asset (2016: $12.6m net asset) and Riverside Energy kft activities $2.6m net liability
(2016: $0.2m net liability).
No deferred tax asset (2016: nil) is recognised in respect of brought forward UK losses. A deferred tax asset of $5.7m (2016: $4.3m-
asset) has been recognised in respect of Yuzhgazenergie LLC losses and other differences as sufficient future taxable profits are
forecast against which the losses can be utilised. Deferred tax asset of $1.4m (2016: $1.4m) has been derecognised in respect of
Riverside Energy kft losses brought forward. No other deferred tax is recognised as the directors do not believe that it would be
prudent to do so.
123
JKX Oil & Gas plc Annual Report 2017
The movement on the deferred tax account in 2017 is as follows:
Deferred tax liabilities
Fixed assets differences
Deferred tax assets
Other temporary differences
Net change in recognised losses carried forward
Net deferred tax movement
The movement on the deferred tax account in 2016 is as follows:
Deferred tax liabilities
Fixed assets differences
Deferred tax assets
Other temporary differences
Net change in recognised losses carried forward
Net deferred tax movement
1 January
2017
$000
Exchange
differences
$000
(Charge)/
credit in the
year
$000
31 December
2017
$000
(6,841)
146
(3,116)
(9,811)
5,396
5,632
11,028
4,187
116
121
237
383
4,470
(6)
4,464
1,348
9,982
5,747
15,729
5,918
1 January
2016
$000
Exchange
differences
$000
(Charge)/credit
in the year
$000
31 December
2016
$000
(6,097)
496
(1,241)
(6,841)
4,559
2,191
6,750
653
104
555
659
1,155
733
2,886
3,619
2,379
5,396
5,632
11,028
4,187
The deferred tax assets in respect of Russian and Ukrainian corporation tax have been recognised with due consideration of the
tax rate effective on the expected unwinding of those temporary differences.
Unprovided deferred taxation
Tax losses
Fixed asset differences
Other temporary differences
2017
$000
2016
$000
(51,939)
(49,458)
(3,641)
(3,593)
(27)
(51)
(55,607)
(53,102)
There is no expiry date on the remaining losses as 31 December 2017. The deductible temporary differences do not expire under
current tax legislation. Deferred tax assets have not been recognised in respect of the unprovided deferred taxation items because it is
not probable that future taxable profit will be available to utilise these deductible temporary differences. The UK corporation tax main
rate will be fixed at 19% for next 2 years and starting from 1 April 2020 - 17%. The impact of the rate reduction is not expected to have
a material impact on provided UK deferred taxation but will reduce unprovided UK deferred tax balances in future periods.
In Russia from 2017 till 2020 a restriction has been introduced on the use of brought forward tax losses against future taxable profits.
Brought forward tax losses in Russia can only mitigate a maximum of 50% of the taxable profits in those years. This has had the impact
of reducing the recognised deferred tax asset on prior year tax losses incurred in Russia. From 2021 it is expected that all brought
forward Russian tax losses can be utilised to mitigate all taxable profits. The 10 year limitation on the use of carried forward tax losses
in Russia has been cancelled.
29. Loss per share
The calculation of the basic and diluted loss per share attributable to the owners of the parent is based on the weighted average number
of shares in issue during the year of 172,125,916 (2016: 172,125,916) and the loss for the relevant year.
Loss before exceptional items in 2017 of $701,204 (2016 loss: $7,461,522) is calculated from the 2017 loss of $17,662,920 (2016:
$37,115,477) and adding back exceptional items of $21,074,348 (2016: $30,823,955) less the related deferred tax on the exceptional
items of $4,112,632 (2016: $1,170,000).
124
JKX Oil & Gas plc Annual Report 2017
GROUP FINANCIAL STATEMENTS
Notes to consolidated financial statements
The diluted earnings per share for the year is based on 172,125,916 (2016: 172,125,916) ordinary shares calculated as follows:
Loss
Loss for the purpose of basic and diluted earnings per share (loss for the year attributable to the
owners of the parent):
Before exceptional item
After exceptional item
Number of shares
Basic weighted average number of shares
Dilutive potential ordinary shares:
Share options
Weighted average number of shares for diluted earnings per share
2017
$000
2016
$000
(701)
(7,462)
(17,663)
(37,115)
2017
2016
172,125,916
172,125,916
-
-
172,125,916
172,125,916
In accordance with IAS 33 (Earnings per share) the effects of antidilutive potential have not been included when calculating dilutive
loss per share for the year end 31 December 2017 (2016: nil). 13,791,259 (2016: 13,925,410) potentially dilutive ordinary shares
associated with the convertible bonds (Note 13) have been excluded as they are antidilutive in 2017, however they could be dilutive in
future periods.
There were 1,059,650 (2016: 2,168,450) outstanding share options at 31 December 2017, of which none (2016: 1,341,750) had a
potentially dilutive effect. All of the Group’s equity derivatives were anti-dilutive for the year ended 31 December 2017.
30. Dividends
No interim dividend was paid for 2017 (2016: nil). In respect of the full year 2017, the directors do not propose a final dividend (2016: no
final dividend paid).
31. Reconciliation of loss from operations to net cash inflow from operations
Loss from operations
Depreciation, depletion and amortisation
Loss on disposal of fixed assets
Exceptional item - reversal of provision for impairment of Ukrainian oil and gas assets
Exceptional item - provision for impairment of Hungary and Slovakia
Exceptional item – write off of appraisal expenditure in Ukraine
Exceptional item – increase in provision for production based taxes
Increase in provisions – onerous lease provision
Share-based payment (credit)/charge
Cash (used in)/generated from operations before changes in working capital
(Increase)/decrease in operating trade and other receivables
Decrease in operating trade and other payables
Increase in inventories
Cash generated from operations
32. Capital commitments
2017
$000
2016
$000
(13,228)
(34,754)
17,428
19,764
557
(5,636)
11,450
9,391
3,144
83
(46)
23,143
(1,179)
(4,897)
(1,344)
311
-
2,000
-
24,340
594
48
12,303
8,119
(2,102)
(1,282)
15,723
17,038
Under the work programmes for the Group’s exploration and development licenses the Group had no commitments to future capital
expenditure on drilling rigs and facilities at 31 December 2017 (2016: $3.3m).
33. Related party transactions
The transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation.
125
JKX Oil & Gas plc Annual Report 2017
Key management personnel are considered to comprise only the Directors. The remuneration of Directors during the year was as
follows:
Short-term employee benefits
Post-employment benefits
Share-based payments (credit)/charge
2017
$000
2,579
43
(46)
2016
$000
5,164
62
81
2,576
5,307
Further information about the remuneration of individual Directors, together with the Directors’ interests in the share capital of JKX
Oil & Gas plc, is provided in the audited part of the Remuneration Report on pages 61 to 73 and in the Directors Report on pages 74 to
77.
The number of board executives for 2017 was 5 to the 30th June. Then July to October only 3 board executives remained. Therefore
board costs were reduced for this period. Also, no bonus was awarded to the Board for 2017.
Share-based payments represents the expenses arising from share-based payments included in the income statement, determined
based on the fair value of the related awards at the date of grant (Note 26).
Vladimir Tatarchuk and Vladimir Rusinov were appointed to the Board on 28 January 2016 and were thought to have a beneficial
interest in Convertible Bonds with principal amount of $3.4m at 31 December 2017 (2016: $3.4m), which are held by Proxima. In
February 2017, in accordance with the terms and conditions of the restructured Bonds, redemptions of Proxima’s bonds of $0.4m were
made in respect of prior accretion amounts (2016: $1.5m under the Bondholder Put Option) (see Note 12 and 13) and Bond interest
payments of $0.4m (31 December 2016: $0.3m) were made to Proxima in relation to their Bond holding.
Since the Annual General Meeting on 30 June 2017 Vladimir Rusinov was removed from the Board of Directors. On 8 December 2017 he
was reappointed to the Board.
Subsidiary undertakings and joint operations
The Company’s principal subsidiary undertakings including the name, country of incorporation, registered address and proportion of
ownership interest for each are disclosed in Note B to the Company’s separate financial statements which follow these consolidated
financial statements.
Transactions between subsidiaries and between the Company and its subsidiaries are eliminated on consolidation.
34. Audit exemptions for subsidiary companies
The Group has elected to take advantage of the full extent of the exemptions available under Section 479A of the Companies Act 2006.
As a result, statutory financial statements will not be audited for the following UK entities: JKX Services Limited, JKX Bulgaria Limited,
JKX Georgia Ltd, JKX (Ukraine) Ltd, Baltic Energy Trading Ltd, EuroDril Limited, JP Kenny Exploration & Production Limited, Page Gas
Ltd, Trans-European Energy Services Limited, JKX Limited.
35. Events after the reporting date
In early February 2018 the Board approved a decision to withdraw from Slovakia. On 16 March 2018 the Company gave a formal notice
of relinquishment of Svidnik, Medzilaborce and Snina exploration licences to the other parties in the joint venture.
126
JKX Oil & Gas plc Annual Report 2017
COMPANY FINANCIAL STATEMENTS
Independent Auditors’ Report
to the members of JKX Oil & Gas plc
Report on the audit of the company financial statements
Opinion
In our opinion, JKX Oil & Gas plc’s company financial statements (the “financial statements”):
give a true and fair view of the state of the company’s affairs as at 31 December 2017;
have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom
Accounting Standards, comprising FRS 101 “Reduced Disclosure Framework”, and applicable law); and
have been prepared in accordance with the requirements of the Companies Act 2006.
We have audited the financial statements, included within the Annual Report, which comprise: the company statement of financial
position as at 31 December 2017; the company statement of changes in equity for the year then ended; and the notes to the financial
statements, which include a description of the significant accounting policies.
Our opinion is consistent with our reporting to the Audit Committee.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our
responsibilities under ISAs (UK) are further described in the Auditors’ responsibilities for the audit of the financial statements section
of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Independence
We remained independent of the group in accordance with the ethical requirements that are relevant to our audit of the financial
statements in the UK, which includes the FRC’s Ethical Standard, as applicable to listed public interest entities, and we have fulfilled
our other ethical responsibilities in accordance with these requirements.
To the best of our knowledge and belief, we declare that non-audit services prohibited by the FRC’s Ethical Standard were not provided
to the group or the company.
Other than those disclosed in the Directors’ Report, we have provided no non-audit services to the company in the period from 1
January 2017 to 31 December 2017.
Material uncertainty relating to going concern
Without further modifying our opinion on the financial statements, we have considered the adequacy of the disclosure made in Note A
to the financial statements concerning the company’s ability to continue as a going concern. At 31 December 2017, one of the company’s
subsidiaries has recorded a provision of $37.1m in relation to additional Rental Fees which may become immediately due and payable
in Ukraine as a result of unfavourable outcomes in one or more of the ongoing court proceedings. These conditions, along with the other
matters explained in Note A to the financial statements, indicate the existence of a material uncertainty which may cast significant
doubt about the company’s ability to continue as a going concern. The financial statements do not include the adjustments that would
result if the company was unable to continue as a going concern.
Explanation of material uncertainty
Note A to the financial statements details the directors’ disclosures of the material uncertainty relating to going concern.
As described in Note A, the company’s Ukrainian subsidiary, Poltava Petroleum Company (‘PPC’) has made provision for potential
liabilities arising from separate court proceedings regarding the amount of production taxes (‘Rental Fees’) paid in Ukraine for certain
periods since 2010, which total approximately $37.1 million (including interest and penalties, see Note 27 to the consolidated financial
statements). PPC continues to contest these claims through the Ukrainian legal system. There is a risk that one or more of the ongoing
court cases ends with an unfavourable outcome, and amounts become immediately due and payable. If this were the case, PPC may not
have sufficient cash to remain viable and therefore may not be able to remit dividends to the company, which would impact the ability of
the company to meet its obligations as they fall due.
Given this risk, the directors have drawn attention to this in disclosing a material uncertainty relating to going concern in the basis of
preparation to the financial statements.
What audit procedures we performed
We have updated our understanding of events in relation to the ongoing disputes that have occurred in 2017 and up to the date of this
report, and have detailed this in a separate Key Audit Matter in our report on the group financial statements included on pages 78-79.
We obtained management’s cash flow forecast which supports their use of the going concern basis of accounting. We tested the
integrity of this model, including mathematical accuracy, and reviewed key assumptions such as forecast sales revenue, capital costs
and operating costs. We considered the consistency of the forecast with 2017 actuals and other forecasts made by management, for
example in impairment models. We also considered historical accuracy of management’s forecasting.
We reviewed management’s downside sensitivities and performed our own sensitivity analysis, focusing on reasonable downside
scenarios including lower than forecast production and lower commodity prices. We also understood the level of committed vs
discretionary spend to determine where costs could be reduced if necessary to mitigate any short term cash shortfall.
127
JKX Oil & Gas plc Annual Report 2017
The base case going concern forecast does not include any outflows in respect of the Rental Fee exposures. The total amounts which
could become payable are material, and the company may not have sufficient cash to meet the obligations should they become
immediately due. This has been deemed a material uncertainty which, if realised, may affect the company’s ability to continue as a
going concern.
Our audit approach
Overview - materiality, audit scope, key audit matters
Overall materiality: $0.60m (2016: $0.60m), based on 0.5% of net assets.
The UK engagement team performed a full scope audit of the company, testing all material financial statement line items.
Use of the going concern assumption.
The scope of our audit
As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial statements.
In particular, we looked at where the directors made subjective judgements, for example in respect of significant accounting estimates
that involved making assumptions and considering future events that are inherently uncertain.
We gained an understanding of the legal and regulatory framework applicable to the company and the industry in which it operates,
and considered the risk of acts by the company which were contrary to applicable laws and regulations, including fraud. We designed
audit procedures to respond to the risk, recognising that the risk of not detecting a material misstatement due to fraud is higher than
the risk of not detecting one resulting from error, as fraud may involve deliberate concealment by, for example, forgery or intentional
misrepresentations, or through collusion. We focused on laws and regulations that could give rise to a material misstatement in the
company’s financial statements, including, but not limited to, the Companies Act 2006, the Listing Rules and UK tax legislation. Our
tests included, but were not limited to, enquiries of management, review of minutes of meetings of the Board of Directors and review of
correspondence with legal advisers. There are inherent limitations in the audit procedures described above and the further removed
non-compliance with laws and regulations is from the events and transactions reflected in the financial statements, the less likely we
would become aware of it.
As in all of our audits we also addressed the risk of management override of internal controls, including testing journals and evaluating
whether there was evidence of bias by the directors that represented a risk of material misstatement due to fraud.
Key audit matters
Key audit matters are those matters that, in the auditors’ professional judgement, were of most significance in the audit of the financial
statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to
fraud) identified by the auditors, including those which had the greatest effect on: the overall audit strategy; the allocation of resources
in the audit; and directing the efforts of the engagement team. These matters, and any comments we make on the results of our
procedures thereon, were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion
thereon, and we do not provide a separate opinion on these matters. The matter described in the Material uncertainty relating to going
concern section is the key audit matter to be communicated in our report. We determined that there were no other key audit matters
applicable to the company to communicate in our report. This is not a complete list of all risks identified by our audit.
How we tailored the audit scope
We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as
a whole, taking into account the structure of the company, the accounting processes and controls, and the industry in which it operates.
The UK engagement team performed a full scope audit of the company, testing material financial statement line items.
Materiality
The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These,
together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit
procedures on the individual financial statement line items and disclosures and in evaluating the effect of misstatements, both
individually and in aggregate on the financial statements as a whole.
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
Overall materiality
$0.60m (2016: $0.60m).
How we determined it
0.5% of net assets.
Rationale for benchmark applied
The company's primary purpose is to hold investments in subsidiaries, so we consider net assets is
an appropriate benchmark. The overall materiality figure used was restricted by the allocation of
materiality to the company as part of the overall group scoping exercise which was $0.60m.
128
JKX Oil & Gas plc Annual Report 2017
COMPANY FINANCIAL STATEMENTS
Independent Auditors’ Report
to the members of JKX Oil & Gas plc
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above $0.06m (2016:
$0.05m) as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons.
Going concern
In accordance with ISAs (UK) we report as follows:
Reporting obligation
Outcome
We are required to report if we have anything material to add or
draw attention to in respect of the directors’ statement in the
financial statements about whether the directors considered it
appropriate to adopt the going concern basis of accounting in
preparing the financial statements and the directors’
identification of any material uncertainties to the company’s
ability to continue as a going concern over a period of at least
twelve months from the date of approval of the financial
statements.
We are required to report if the directors’ statement relating to
Going Concern in accordance with Listing Rule 9.8.6R(3) is
materially inconsistent with our knowledge obtained in the audit.
We have nothing material to add or to draw attention to other
than the material uncertainty we have described in the material
uncertainty relating to going concern section above. However,
because not all future events or conditions can be predicted, this
statement is not a guarantee as to the company’s ability to
continue as a going concern.
We have nothing to report.
Reporting on other information
The other information comprises all of the information in the Annual Report other than the financial statements and our auditors’
report thereon. The directors are responsible for the other information. Our opinion on the financial statements does not cover the
other information and, accordingly, we do not express an audit opinion or, except to the extent otherwise explicitly stated in this
report, any form of assurance thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider
whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or
otherwise appears to be materially misstated. If we identify an apparent material inconsistency or material misstatement, we are
required to perform procedures to conclude whether there is a material misstatement of the financial statements or a material
misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of
this other information, we are required to report that fact. We have nothing to report based on these responsibilities.
With respect to the Strategic Report and Directors’ Report, we also considered whether the disclosures required by the UK Companies
Act 2006 have been included.
Based on the responsibilities described above and our work undertaken in the course of the audit, the Companies Act 2006, (CA06),
ISAs (UK) and the Listing Rules of the Financial Conduct Authority (FCA) require us also to report certain opinions and matters as
described below (required by ISAs (UK) unless otherwise stated).
Strategic Report and Directors’ Report
In our opinion, based on the work undertaken in the course of the audit, the information given in the Strategic Report and Directors’
Report for the year ended 31 December 2017 is consistent with the financial statements and has been prepared in accordance with
applicable legal requirements. (CA06)
In light of the knowledge and understanding of the company and its environment obtained in the course of the audit, we did not
identify any material misstatements in the Strategic Report and Directors’ Report. (CA06)
The directors’ assessment of the prospects of the company and of the principal risks that would threaten the solvency or liquidity
of the company
We have nothing material to add or draw attention to regarding:
The directors’ confirmation on page 40 of the Annual Report that they have carried out a robust assessment of the principal risks
facing the company, including those that would threaten its business model, future performance, solvency or liquidity.
The disclosures in the Annual Report that describe those risks and explain how they are being managed or mitigated.
The directors’ explanation on page 40 of the Annual Report as to how they have assessed the prospects of the company, over what
period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a
reasonable expectation that the company will be able to continue in operation and meet its liabilities as they fall due over the period
of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions.
We have nothing to report having performed a review of the directors’ statement that they have carried out a robust assessment of the
principal risks facing the company and statement in relation to the longer-term viability of the company. Our review was substantially
less in scope than an audit and only consisted of making inquiries and considering the directors’ process supporting their statements;
checking that the statements are in alignment with the relevant provisions of the UK Corporate Governance Code (the “Code”); and
129
JKX Oil & Gas plc Annual Report 2017
considering whether the statements are consistent with the knowledge and understanding of the company and its environment
obtained in the course of the audit. (Listing Rules)
Other Code Provisions
We have nothing to report in respect of our responsibility to report when:
The statement given by the directors, on page 77, that they consider the Annual Report taken as a whole to be fair, balanced and
understandable, and provides the information necessary for the members to assess the company’s position and performance,
business model and strategy is materially inconsistent with our knowledge of the company obtained in the course of performing our
audit.
The section of the Annual Report on page 56 describing the work of the Audit Committee does not appropriately address matters
communicated by us to the Audit Committee.
The directors’ statement relating to the company’s compliance with the Code does not properly disclose a departure from a relevant
provision of the Code specified, under the Listing Rules, for review by the auditors.
Directors’ Remuneration
In our opinion, the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the
Companies Act 2006. (CA06)
Responsibilities for the financial statements and the audit
Responsibilities of the directors for the financial statements
As explained more fully in the Directors’ responsibilities Statement set out on pages 76-77, the directors are responsible for the
preparation of the financial statements in accordance with the applicable framework and for being satisfied that they give a true and
fair view. The directors are also responsible for such internal control as they determine is necessary to enable the preparation of
financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the directors are responsible for assessing the company’s ability to continue as a going concern,
disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either
intend to liquidate the company or to cease operations, or have no realistic alternative
Auditors’ responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high
level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material
misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the
aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial
statements.
A further description of our responsibilities for the audit of the financial statements is located on the FRC’s website at:
www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditors’ report.
Use of this report
This report, including the opinions, has been prepared for and only for the company’s members as a body in accordance with Chapter 3
of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for
any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by
our prior consent in writing.
Other required reporting
Companies Act 2006 exception reporting
Under the Companies Act 2006 we are required to report to you if, in our opinion:
we have not obtained all the information and explanations that we considered necessary for the purpose of our audit; and
we were unable to determine whether adequate accounting records have been kept by the company and returns adequate for our
audit have not been received from branches not visited by us; or
certain disclosures of directors’ remuneration specified by law are not made; or
the financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the accounting
records and returns.
We have no exceptions to report arising from this responsibility.
Appointment
Following the recommendation of the audit committee, we were appointed by the members on 18 May 2006 to audit the financial
statements for the year ended 31 December 2006 and subsequent financial periods. The period of total uninterrupted engagement is 12
years, covering the years ended 31 December 2006 to 31 December 2017.
130
JKX Oil & Gas plc Annual Report 2017
COMPANY FINANCIAL STATEMENTS
Independent Auditors’ Report
to the members of JKX Oil & Gas plc
Other matter
We have reported separately on the group financial statements of JKX Oil & Gas plc for the year ended 31 December 2017. The opinion
in that report is qualified and also includes a material uncertainty related to going concern section.
Kevin Reynard (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
27 April 2018
131
JKX Oil & Gas plc Annual Report 2017
COMPANY FINANCIAL STATEMENTS
Company statement of financial position
For the year ended 31 December 2017
Assets
Non-current assets
Investments
Trade and other receivables
Current assets
Trade and other receivables
Cash and cash equivalents
Total assets
Liabilities
Current liabilities
Trade and other payables
Derivatives
Non-current liabilities
Derivatives
Total liabilities
Net Assets
Equity
Called up share capital
Share premium account
Other reserves
Retained earnings
Total equity
Note
2017
$000
2016
$000
B
C
C
E
F
F
F
G
G
21,424
21,424
152,133
190,026
173,557
211,450
351
1,320
1,671
46,805
3,162
49,967
175,228
261,417
(104,508)
(103,285)
-
(1,341)
(104,508)
(104,626)
(3)
-
(104,511)
(104,626)
70,717
156,791
26,666
97,476
(503)
26,666
97,476
(503)
(52,922)
33,152
70,717
156,791
The Company has elected to take the exemption under section 408 of the Companies Act 2006, to not present the parent company
income statement. The net loss for the parent company was $86.0m (2016: $17.5m).
These financial statements on pages 131 to 143 were approved by the Board of Directors on 27 April 2018 and signed on its behalf by:
Hans Jochum Horn Chairman
Ben Fraser Chief Financial Officer
132
JKX Oil & Gas plc Annual Report 2017
COMPANY FINANCIAL STATEMENTS
Company statement of changes in equity
For the year ended 31 December 2017
At 1 January 2016
Loss for the financial year
Total comprehensive loss for the year
Share option charge
Total transactions with equity shareholders
Called up
share
capital
$000
26,666
Share
premium
account
$000
97,476
-
-
-
-
-
-
-
-
Retained
earnings
$000
50,627
(17,523)
(17,523)
48
48
Other
reserves
$000
Total
equity
$000
(503)
174,266
-
-
-
-
(17,523)
(17,523)
48
48
At 31 December 2016
26,666
97,476
33,152
(503)
156,791
At 1 January 2017
Loss for the financial year
Total comprehensive loss for the year
Share option credit
Total transactions with equity shareholders
Called up
share
capital
$000
Share
premium
account
$000
Retained
earnings/(acc
umulated
losses)
$000
26,666
97,476
-
-
-
-
-
-
-
-
33,152
(86,028)
(86,028)
(46)
(46)
Other
reserves
$000
Total
equity
$000
(503)
156,791
-
-
-
-
(86,028)
(86,028)
(46)
(46)
At 31 December 2017
26,666
97,476
(52,922)
(503)
70,717
133
JKX Oil & Gas plc Annual Report 2017
COMPANY FINANCIAL STATEMENTS
Notes to the Company financial statements
A. Presentation of the financial statements
Basis of preparation
The financial statements have been prepared under the historical cost convention, as modified for financial assets and financial
liabilities (including derivative instruments) at fair value through income statement, and in accordance with the Companies Act 2006
as applicable to companies using Financial Reporting Standard 101, ‘Reduced Disclosure Framework’ (FRS 101) .
Please refer to Directors’ report on page 74 for information on Company’s domicile, legal form, country of incorporation, description of
the nature of the entity’s operations and business activities.
Going concern
The majority of the Group’s revenues, profits and cash flow from operations are currently derived from its oil and gas production in
Ukraine, rather than Russia.
The Company’s Ukrainian subsidiary, Poltava Petroleum Company (‘PPC’) has made provision for potential liabilities arising from
separate court proceedings regarding the amount of production taxes (‘Rental Fees’) paid in Ukraine for certain periods since 2010,
which total approximately $37.1 million (including interest and penalties, see Note 27 to the consolidated financial statements). PPC
continues to contest these claims through the Ukrainian legal system.
In February 2017, the international arbitration tribunal ruled that Ukraine was found not to have violated its treaty obligations in
respect of the levying of Rental Fees but awarded the Company damages of $11.3 million plus interest, and costs of $0.3 million in
relation to subsidiary claims. No adjustment has been made in these financial statements to recognise any possible future benefit to the
Company that may result from the tribunal award in the Company’s favour for damages of $11.8 million plus interest, and costs of $0.3
million, with the tribunal ruling subject to enforcement proceedings in Ukrainian courts.
Taking into account the damages awarded to the Company and the Ukrainian court proceedings against PPC in respect of production
taxes, there is a net shortfall of $21.7 million owed by the Group to Ukraine. Should PPC lose the claims against it in respect of
production taxes due for 2010 and 2015, and the Ukrainian Authorities demand immediate settlement, the Group does not currently
have sufficient cash resources to settle the claims and this would affect its ability to meet its obligations to creditors and bondholders.
Accordingly, the Group’s going concern assessment is sensitive to the outcome of the production-related tax disputes with the
Ukrainian Government.
The Directors have concluded that it is necessary to draw attention to the potential impact of the Group becoming liable for additional
Rental Fees in Ukraine as a result of unfavourable outcomes in one or both of the ongoing court proceedings. It is unclear whether
either or both of these claims against PPC will be realised and settlement enforced but they are material uncertainties which may cast
significant doubt about the Group’s ability to continue as a going concern.
However, based on the Group’s cash flow forecasts, the Directors believe that the combination of its current cash balances, expected
future production and resulting net cash flows from operations, as well as the availability of additional courses of action with respect to
financing and/or negotiation with Ukraine for the settlement of any successful production tax claim, mean that it is appropriate to
continue to adopt the going concern basis of accounting in preparing these financial statements. These financial statements do not
include the adjustments that would result if the Group was unable to continue as a going concern.
Adoption of new and revised standards
No new accounting standards, or amendments to accounting standards, or IFRS IC interpretations that are effective for the year ended
31 December 2017, have had a material impact on the company. Please refer to Group’s accounting policies note for the full disclosure.
Disclosure exemptions
The Company has taken advantage of the following disclosure exemptions under FRS 101:
Presentation of statement of cash flows;
The requirements of IFRS 7 ‘Financial instruments’: Disclosure of quantitative and qualitative information regarding risks arising
from all financial instruments held by the Company. Equivalent disclosures are included in the Group’s consolidated financial
statements;
The requirement of IFRS 13 ‘Fair Value Measurement’ to disclose the valuation techniques and inputs used to develop fair value
measurements for assets and liabilities held at fair value. Equivalent disclosures are included in the Group consolidated financial
statements;
Disclosure of related party transactions entered into between two or more members of a group. Equivalent disclosures are included
in the Group consolidated financial statements;
Disclosure of information relating to new standards not yet effective and not yet applied.
Property, plant and equipment
Property, plant and equipment are stated at historic purchase cost less accumulated depreciation. Cost includes the original purchase
price of the asset and the costs attributable to bringing the asset to its working condition for its intended use. Depreciation is calculated
to write off the cost of property, plant and equipment, less their residual values, over their expected useful lives using the straight line
basis as follows:
Fixtures and fittings
- five to ten years
134
JKX Oil & Gas plc Annual Report 2017
COMPANY FINANCIAL STATEMENTS
Notes to the Company financial statements
Computer equipment and software
- three years
Investments in subsidiaries
Investments are initially measured at historic cost, including transaction costs, and stated at cost less accumulated impairment losses.
The Company assesses investments for impairment whenever events or changes in circumstances indicate that the carrying value of an
investment may not be recoverable. If any such indication of impairment exists, the Company makes an estimate of its recoverable
amount. Where the carrying amount of an investment exceeds its recoverable amount, the investment is considered impaired and is
written down to its recoverable amount.
Foreign currencies
Transactions in foreign currencies are initially recorded at the exchange rate ruling at the date of the transaction. Monetary assets and
liabilities denominated in foreign currencies are translated at the rates of exchange ruling at the statement of financial position date,
with a corresponding charge or credit to the income statement. Non-monetary items are measured in terms of historical cost in foreign
currency and are translated using the exchange rates of the original transaction.
The presentation and functional currency of the Company is the US Dollar. The US$/£ exchange rate used for the revaluation of the
closing statement of financial position at 31 December 2017 was $1/£0.74 (2016: $1/£0.81).
Share based payments
The Company operates a number of equity-settled, share-based compensation plans, under which the Company receives services from
Executive Directors and Senior Management as consideration for equity instruments (options) of the Company. The fair value of the
services received from Executive Directors and Senior Management in exchange for the grant of the options is recognised as an
expense. The total amount to be expensed is determined by reference to the fair value of the options granted:
including any market performance conditions; (for example, the Company's share price);
excluding the impact of any service and non-market performance vesting conditions (for example, profitability, sales growth targets
and remaining an employee of the entity over a specified time period); and
including the impact of any non-vesting conditions (for example, the requirement for employees to save).
Non-market performance and service conditions are included in assumptions about the number of options that are expected to vest.
The total expense is recognised over the vesting period, which is the period over which all of the specified vesting conditions are to be
satisfied.
In addition, in some circumstances employees may provide services in advance of the grant date and therefore the grant date fair value
is estimated for the purposes of recognising the expense during the period between service commencement period and grant date.
At the end of each reporting period, the Company revises its estimates of the number of options that are expected to vest based on the
non-market vesting conditions. It recognises the impact of the revision to original estimates, if any, in the income statement, with a
corresponding adjustment to equity.
When the options are exercised, the Company issues new shares or shares held by the JKX Employee Benefit Trust. The proceeds
received net of any directly attributable transaction costs are credited to share capital (nominal value) and share premium.
The grant by the Company of options over its equity instruments to the employees of subsidiary undertakings in the group is treated as
a capital contribution. The fair value of employee services received, measured by reference to the grant date fair value, is recognised
over the vesting period as an increase to investment in subsidiary undertakings, with a corresponding credit to equity in the parent
entity financial statements.
The social security contributions payable in connection with the grant of the share options is considered an integral part of the grant
itself, and the change will be treated as a cash-settled transaction.
The rules regarding the scheme are described in the Remuneration Report on page 64 and in Note I on share based payments.
Share capital and treasury shares
Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares are recognised as a
deduction from share premium, net of any tax effects. When share capital recognised as equity is repurchased, the amount of the
consideration paid, which includes directly attributable costs, net of any tax effects, is recognised as a deduction from share premium.
Repurchased JKX Oil & Gas plc shares are classified as treasury shares in shareholders’ equity and are presented in the reserve for own
shares. The consideration paid, including any directly attributable incremental costs is deducted from equity attributable to the
Company’s equity holders until the shares are cancelled or reissued.
When treasury shares are sold or reissued subsequently, the amount received is recognised as an increase in equity, and the resulting
surplus or deficit on the transaction is presented in share premium. No gain or loss is recognised in the financial statements on the
purchase, sale, issue or cancellation of treasury shares.
JKX Employee Benefit Trust
The JKX Employee Benefit Trust was established in 2014 to hold ordinary shares purchased to satisfy various new share scheme
awards made to the employees of the Company which will be transferred to the members of the scheme on their respective vesting
dates subject to satisfying the performance conditions of each scheme.
135
JKX Oil & Gas plc Annual Report 2017
The trust has been consolidated in the Group financial statements in accordance with IFRS 10. The cost of shares temporarily held by
the trusts are reflected as treasury shares and deducted from equity.
Leasing
Rentals payable under operating leases are charged to the income statement on a straight-line basis over the term of the relevant lease.
Under operating leases, the risks and rewards of ownership are retained by the lessor. The Company has no finance leases.
Financial instruments
Financial assets and financial liabilities are recognised on the Company’s balance sheet when the Company becomes party to the
contractual provisions of the instrument.
Derivative financial instruments
The Company accounts for derivative financial instruments in line with IFRS 7 – ‘Financial Instruments: Disclosures’ and IAS 39 –
‘Financial Instruments: Recognition and measurement’.
Any such derivative was initially recorded at fair value on the date at which the contract was entered into and subsequently re-
measured at fair value on subsequent reporting dates.
A financial liability is derecognised when the obligation under the liability is discharged, cancelled or expires.
Fair value is the amount for which a financial asset, liability or instrument could be exchanged between knowledgeable and willing
parties in an arm’s length transaction. It is determined by reference to quoted market prices adjusted for estimated transaction costs
that would be incurred in an actual transaction, or by the use of established estimation techniques such as option pricing models and
estimated discounted values of cash flows.
Convertible bonds due 2020
The fair value of the embedded derivative associated with the convertible bond has been calculated at inception and changes in the fair
value at each reporting date are recognised in the income statement.
Cash and cash equivalents
Cash and cash equivalents comprise cash in hand and current balances with banks and similar institutions, which are readily
convertible to known amounts of cash. Cash is short-term with an original maturity of less than 3 months, highly liquid investments
that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.
Restricted cash
Restricted cash is disclosed separately in the notes and denoted as restricted when it is not under the exclusive control of the Company.
Financial liabilities and equity
Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An
equity instrument is any contract that evidences a residual interest in the assets of the Company after deducting all of its liabilities.
Equity instruments issued by the Company are recorded at the proceeds received net of direct issue costs.
Dividends
Interim dividends are recognised when they are paid to the Company’s shareholders. Final dividends are recognised when they are
approved by shareholders.
Taxation
Income tax expense represents the sum of the current tax payable and deferred tax.
The current tax payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income
statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items
that are never taxable or deductible. Company’s liability for current tax is calculated using tax rates that have been enacted or
substantively enacted by the reporting date.
Tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity or in other
comprehensive income, in which case the tax is also dealt with in equity or other comprehensive income respectively.
Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amount of assets and liabilities in the
financial statements and the corresponding tax base used in the computation of taxable profit. Deferred tax liabilities are generally
recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable
profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if
the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and
liabilities in a transaction that affects neither the tax profit nor the accounting profit.
Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries, and interests in joint
ventures, except where the Company is able to control the reversal of the temporary difference and it is probable that the temporary
difference will not reverse in the foreseeable future.
The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable
that sufficient taxable profit will be available to allow all or part of the asset to be recovered. Any such reduction shall be reversed to
the extent that it becomes probable that sufficient taxable profit will be available.
136
JKX Oil & Gas plc Annual Report 2017
COMPANY FINANCIAL STATEMENTS
Notes to the Company financial statements
Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset realised
based on tax rates and laws substantively enacted by the reporting date. Deferred tax assets and liabilities are offset when there exists
a legal and enforceable right to offset and they relate to income taxes levied by the same taxation authority and the Company intends
to settle its current tax assets and liabilities on a net basis.
B. Investments
The net book value of unlisted fixed asset investments comprises:
Cost
At 1 January
Additions
At 31 December
Equity investment in subsidiaries
At 31 December
2017
$000
2016
$000
21,424
-
21,424
8,242
13,182
21,424
21,424
21,424
Additions during 2016 relate to investment in the Company’s subsidiary, JP Kenny Exploration & Production Limited.
During 2012, JKX Oil & Gas (Jersey) Limited was incorporated in Jersey as a wholly-owned subsidiary. Its sole activity is to hold the
bonds that were issued in February 2013 and which provided finance for the JKX Group of companies (see Note 13 to the consolidated
financial statements).
137
JKX Oil & Gas plc Annual Report 2017
% held
(ordinary
shares)
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
62.00
100.00
100.00
Country of incorporation
and area of operation
Netherlands
Ukraine
UK
Russia
Ukraine
UK
UK
Bulgaria
Netherlands
UK
Netherlands
UK
Cyprus
Netherlands
Jersey
Netherlands
UK
Netherlands
Netherlands
UK
UK
Ukraine
UK
Netherlands
Ukraine
Hungary
Ukraine
UK
Russia
At 31 December 2017, subsidiary undertakings of JKX Oil & Gas plc were:
Name
Adygea Gas B.V. 1
Business
Holding
Baltic Catering Services 2
Oil & gas services
Baltic Energy Trading Ltd* 3
Oil & gas exploration and production
Catering-Yug LLC4
Oil & gas services
Eastern Ukrainian Pipeline Ltd 8
Oil & gas services
EuroDril Limited3
JKX Bulgaria Limited* 5
JKX Bulkan BG EAD 10
JKX Carpathian BV 1
JKX Georgia Ltd*3
JKX Hungary BV 1
JKX Ltd*5
JKX (Navtobi) Limited 9
JKX (Nederland) B.V. 1
Oil & gas exploration, production and services
Oil & gas exploration and production
Oil & gas exploration and production
Oil & gas exploration and production
Oil & gas exploration, production and services
Oil & gas exploration and production
Dormant
Oil & gas exploration and production
Finance and Holding
JKX Oil & Gas (Jersey) Limited* 6
Finance
JKX Ondava BV 1
Oil & gas exploration and production
JKX Services Limited*5
Services
JKX Slovakia BV 1
JKX Ukraine BV 1
JKX (Ukraine) Ltd* 5
Oil & gas exploration and production
Finance and Holding
Oil & gas exploration, production and services
JP Kenny Exploration & Production
Limited* 5
Kharkiv Investment Company 8
Finance and Holding
Holding
Page Gas Ltd* 5
Poltava Gas B.V. 1
Oil & gas exploration and production
Holding
Poltava Petroleum Company 2
Oil & gas exploration and production
Folyópart Energia Kft 11
Shevchenko Farma 12
Oil & gas exploration, production and services
Land lease
Trans-European Energy Services Limited* 5 Oil & gas exploration, production and services
Yuzhgazenergie LLC 7
Oil & gas exploration, production and services
* Held directly by JKX Oil & Gas plc. All other companies are held through subsidiary undertakings.
Company registered addresses:
1. Schiphol Boulevard 283, Tower F, 7th floor, 1118 BH Schiphol, Netherlands
2. 153 Frunze Street, Poltava, 36002, Ukraine
3. Tricor Suite, 4th Floor, 50 Mark Lane, London, EC3R 7QR, England
4. 177-a Pervomaiskaya Str., Maikop, Adygea Republic, 385000, Russia
5. 6 Cavendish Square, London, W1G 0PD, England
6. 47 Esplanade, St Helier, JE1 0BD, Jersey
7. 400m from Shovgenovsk-Koshekhabl motor road, a. Koshekhabl, Koshekhablsky District, Republic of Adygea, 385400, Russia
8. Production site of JV PPC, Sokolova Balka, Novosanjary district, Poltava region, 39352, Ukraine
9. 1st Floor, 22 Stasicratous Olga Court, Nicosia, Cyprus
10. 45/A Bulgaria Boulevard, Sofia, 1404, Bulgaria
11. VI. Floor, Vaci ut 33, Budapest, 1134, Hungary
12. 27-V Peremohy Str., Sokolova Balka, Novi Sanzhary Rayon, Poltava Oblast, 39352, Ukraine
a Schevchenko farm does not need to be consolidated as the Group does not have any control over the entity.
In the opinion of the Directors the carrying value of the investments is supported by their underlying net assets.
138
JKX Oil & Gas plc Annual Report 2017
COMPANY FINANCIAL STATEMENTS
Notes to the Company financial statements
C. Trade and other receivables
Current
Amounts owed by group undertakings
Prepayments and accrued income
VAT receivable
2017
$000
-
182
169
351
2016
$000
46,540
102
163
46,805
Balance at 31 December 2016 of $46.5m owed by subsidiary undertakings was unsecured, bore interest based on LIBOR plus a mark-up
and was repayable on demand. Although amounts owed by group undertakings were due on demand, it was management's intention
that the amounts would not be demanded in less than one year.
Non-current
Amounts owed by group undertakings
2017
$000
2016
$000
152,133
190,026
$152.1m (2016: $169.4m) owed by subsidiary undertakings bears no interest as these loans were classified as quasi-equity.
During the year the Company increased provision for impairment by $84.7m (recognised in 2016: $65.7m) related to intercompany loan
receivables, of which, $41.7m (balance at 1 January 2017 of $46.5 less movement in 2017 of $4.8m) (2016: $5.1m) is due within one year
from its wholly owned subsidiary and $43.0m (2016: $60.6m) is due from various subsidiaries after more than one year. Following
recent impairments to some of the assets held by subsidiaries (see Note 5 to the consolidated financial statements), the Company
expects that the carrying value of the intercompany loan receivable may not be recoverable as these entities may not generate
sufficient future profits from the impaired assets to settle the amounts owing and accordingly, these amounts have been provided for.
D. Taxation
Total tax charge for the year
2017
$000
-
2016
$000
-
Factors that affect the total tax charge
The total tax charge for the year of nil (2016: nil) is higher (2016: higher) than the average rate of UK corporation tax of 19.25% (2016:
20%). The differences are explained below:
Total tax reconciliation
Loss on ordinary activities before taxation
Tax calculated at 19.25% (2016: 20%)
Other fixed asset differences
Net change in unrecognised losses carried forward
Non taxable income
Other non-deductible expenses
Total tax charge
2017
$000
(86,028)
(16,560)
(1)
916
(22)
15,667
-
2016
$000
(17,523)
(3,505)
(1)
1,831
(1,800)
3,475
-
139
JKX Oil & Gas plc Annual Report 2017
Unprovided deferred tax
Tax losses
Property, plant and equipment differences
Other temporary differences
2017
$000
5,838
5
(8)
2016
$000
5,044
5
8
5,835
5,057
Neither the deductible temporary differences nor the tax losses expire under current tax legislation. Deferred tax assets have not
been recognised in respect of the unprovided deferred taxation items because it is not probable that future taxable profit will be
available to utilise these deductible temporary differences.
Changes to the UK corporation tax rates were substantively enacted as part of Finance Bill 2015 and Finance Bill 2016. These include
reductions to the main rate to reduce the rate to 19% from 1 April 2017 and to 17% from 1 April 2020. The impact of the rate reduction
is not expected to have a material impact on UK current or provided deferred taxation but is expected to reduce unprovided UK
deferred tax balances in future periods.
E. Cash and cash equivalents
Cash and cash equivalents
Total
F. Trade and other payables
Current
Amounts owed to group undertakings
Trade payables
Accruals and deferred income
Derivatives
Non-current
Derivatives
Maturity of financial liabilities
31 December 2017
Maturity of financial liabilities
Amounts owed to group undertakings
Trade payables
Accruals
Derivatives
2017
$000
1,320
1,320
2016
$000
3,162
3,162
2017
$000
2016
$000
103,767
101,346
584
157
-
1,029
910
1,341
104,508
104,626
3
-
In 1 year or
less, or on
demand
$000
103,767
584
157
-
2-5 years
$000
-
-
-
3
140
JKX Oil & Gas plc Annual Report 2017
COMPANY FINANCIAL STATEMENTS
Notes to the Company financial statements
31 December 2016
Maturity of financial liabilities
Amounts owed to group undertakings
Trade payables
Accruals
Derivatives
In 1 year or less,
or on demand
$000
2-5 years
$000
101,346
1,029
910
1,341
-
-
-
Non-current derivative financial instruments
Convertible bonds due 2020 – embedded derivatives
On 19 February 2013 the Company successfully completed the placing of $40m of guaranteed unsubordinated convertible bonds with
institutional investors which were due 2018 (prior to restructuring) raising cash of $37.2m net of issue costs. The Company’s wholly-
owned direct subsidiary, JKX Oil & Gas (Jersey) Limited holds the bonds raised to finance the JKX Group. The Company unconditionally
guaranteed all the performance conditions including the conversion option.
Prior to restructuring the Bonds had an annual coupon of 8 per cent per annum payable semi-annually in arrears.
The Bonds are convertible into ordinary shares of the Company at any time from 1 April 2013 up until seven days prior to their
maturity on 19 February 2020 (2018 prior to restructuring) at a conversion price of 76.29 pence per Ordinary Share, unless the
Company settles the conversion notice by paying the Bondholder the Cash Alternative Amount (see below).
Convertible bonds restructured on 3 January 2017
On 3 January 2017 a special resolution was approved by Bondholders to change the terms and conditions of the Bonds. The main
amendments to the terms and conditions of the Bonds were as follows:
the Bondholder's option to require redemption of all of the outstanding Bonds on 19 February 2017 was deleted;
the final maturity date of the Bonds was extended to 19 February 2020, with the outstanding principal amount of the Bonds being
repaid in three instalments; 33% on 19 February 2018; 33 % on 19 February 2019; and 34% on the 19 February 2020;
the coupon rate of the Bonds was increased from 8% to 14%;
the covenant which limited new borrowings by the Company had been removed; and
the Company were to make two payments to Bondholders in respect of prior accretion amounts, on 19 February 2017 and on 19
February 2018 of 12.0% and 3.0%, respectively, of the principal amount of the Bonds.
19 February 2017 the Company made first payment to Bondholders of $1.9m, 12.0% of the principal amount of the Bonds, in respect of
prior accretion amounts and in accordance with the terms and conditions of the Bond. 19 February 2018 the Company made a payment
of the first instalment to Bondholders of $5.3m (33% of the principal amount of the Bonds), together with final accretion payment of
$0.5m (3.0% of the principal amount of the Bonds) and $1.1m interest payment in accordance with the terms and conditions of the
Bond.
The revised terms and conditions of the Bond is considered to be a modification and therefore the difference in the amortised cost
carrying amount at the modification date is recognised through a change in the effective interest rate at the modification date through
to the end of the revised estimated term of the Bond. Interest, after the deduction of issue costs is charged to the income statement
using an effective rate of 17.3% (18.0% prior to restructuring).
There is therefore no impact of the restructuring of the Bond on the Consolidated Income Statement in 2017.
The impact of the amendments to the Bond on the Consolidated Statement of Financial Position was to decrease the carrying amount of
the total Bond liability of $18.1m (at 31 December 2016, includes the associated derivative) by $0.7m, which will be amortised over the
estimated remaining life of the modified Bond.
In accordance with IFRS 9, following a modification or renegotiation of a financial liability that does not result in de-recognition, the
Group is required to recognise any modification gain or loss immediately in profit or loss. Any gain or loss is determined by
recalculating the gross carrying amount of the financial liability by discounting the new contractual cash flows using the original
effective interest rate. The difference between the original contractual cash flows of the Bond and the modified cash flows discounted
at the original effective interest rate is trivial and hence there will be no impact on adoption of IFRS 9 on 1 January 2018.
Cash Alternative Amount
At the option of the Company, the conversion notice in respect of the Bonds can be settled in cash rather than shares, the Cash
Alternative Amount payable is based on the Volume Weighted Average Price of the Company’s shares prior to the conversion notice.
Convertible bonds repurchased and cancelled – 2016 information
On 19 February 2016, in accordance with the terms and conditions of the Bonds, the Company repurchased 50 Bonds with a total principal
amount of $10m. In June, September and October 2016, the Company repurchased and subsequently cancelled a total of 50 Bonds with par
value of $10m resulting in $1.1m gain on redemption, which has been included in Finance income for the year ended 31 December 2016
141
JKX Oil & Gas plc Annual Report 2017
(see Group Annual Return for the year ended 31 December 2016, Note 21). The remaining principal amount of outstanding Bonds at 31
December 2016 was $16.0m. There were no Bonds repurchases during 2017.
Bondholder Put Option– cancelled 3 January 2017
Bondholders had the right to require the Company to redeem the following number of Bonds on the following dates together with
accrued and unpaid interest to (but excluding) such dates:
Redemption Date
19 February 2017
Maximum number of Bonds to be
redeemed
all outstanding Bonds
At 31 December 2016 current liabilities included $16.8m in respect of the put option available to bondholders on 19 February 2017. On
3 January 2017, this put option was cancelled as part of the Bond restructuring. Bonds with a principal amount of $10.0m were
redeemed on 19 February 2016 in addition to an early redemption premium of $0.9m in accordance with the terms and conditions of
the bond.
Company Call Option
The Company can redeem the Bonds at any time in full but not in part at their principal amount plus one semi-annual coupon plus any
accrued interest. If the Bonds are called prior to 19 February 2020, the redemption price will also include an additional U.S. $6,000 per
Bond.
The Company can redeem the Bonds any time in full but not in part at their principal amount plus any accrued interest if the aggregate
principal amount of the Bonds outstanding is less than 15% of the aggregate principal amount originally issued.
Fixed exchange rate
The Sterling-US Dollar exchange rate is fixed at £1/$1.5809 for the conversion and other features.
G. Called up share capital and other reserves
Share capital, denominated in Sterling, was as follows:
2017
Number
2017
£000
2017
$000
2016
Number
2016
£000
2016
$000
Authorised
Ordinary shares of 10p each
300,000,000
30,000
-
300,000,000
30,000
-
Allotted, called up and fully paid
Opening balance at 1 January
172,125,916
17,212
26,666
172,125,916
17,212
26,666
Exercise of share options
-
-
-
-
-
-
Closing balance at 31 December
172,125,916
17,212
26,666
172,125,916
17,212
26,666
Of which the following are shares held in treasury:
Treasury shares held at 1 January and
31 December
402,771
40
77
402,771
40
77
The Company purchased no treasury shares during 2017 (2016: none). There were no treasury shares used in 2017 (2016: none) to settle
share options. There are no shares reserved for issue under options or contracts. As at 31 December 2017 the market value of the
treasury shares held was $0.1m (2016: $0.2m).
Other reserves
Capital Redemption
Reserve
$000
Foreign Currency
Translation reserve
$000
Total
$000
At 1 January 2017 and 31 December 2017
587
(1,090)
(503)
The foreign currency translation reserve comprises differences arising from the retranslation of the Company balance sheet from £
Sterling into US Dollars in 2006.
H. Share-based payments
Share options are granted to senior management based on performance criteria. The scheme rules are described in the Directors’
Remuneration Report. All share-based payments are equity settled.
According to the Plan that is currently in place, the Remuneration Committee has the ability to grant awards of nil-cost options
annually to senior management of the Group, conditional on the Group performance over a period of at least three years.
142
JKX Oil & Gas plc Annual Report 2017
COMPANY FINANCIAL STATEMENTS
Notes to the Company financial statements
At 31 December 2017, there were outstanding options under Performance Share Plan (PSP) (2016: under various employee share option
schemes), exercisable during the years 2018 to 2026 (2016: 2017 to 2026), to acquire 1,059,650 (2016: 2,168,450) shares of the
Company at nil cost per share (2016: share price ranging from 0.00p to £59.75p). The vesting period for 1,059,650 (2016: 2,168,450) of
the share options is 3 years, with an exercise period of 7 years making a 10 year maximum term.
The following table illustrates the number and weighted average exercise prices (‘WAEP’) of, and movements in, share options during
the year.
Outstanding as at 1 January
Granted during the year
Lapsed/forfeited during the year
Outstanding at 31 December
Exercisable at 31 December
2017
Number
2017
WAEP
2016
Number
2,168,450
22.78p
12,740,100
-
-
711,250
(1,108,800)
44.55p
(11,282,900)
1,059,650
0.00p
2,168,450
-
-
-
2016
WAEP
28.39p
0.00p
27.68p
22.78p
-
For the share options outstanding as at 31 December 2017, the weighted average remaining contractual life is 8.0years (2016: 8.3
years). Weighted average exercise prices (‘WAEP’) of options outstanding at 31 December 2017 is nil (2016:22.78) due to lapse of
remaining DSOS awards granted in 2014 during the year, which had an exercise price of 59.75p.
During the year no share options were granted in accordance with the Performance Share Plan (‘PSP’), which was introduced in 2010.
And no share options were granted in accordance with the Discretionary Share Option Scheme (‘DSOS’). This schemes reflect the best
practice aspects recommended by the Association of British Insurers following the publication of their guidelines in March 2001 (the
‘ABI Guidelines’).
From 2015 onwards, grants under DSOS ceased in accordance with our policy.
Lapsed or forfeited Directors share options in 2016
On 28 January 2016, following a General Meeting of the Company, the service contracts of the four Executive Directors were
terminated with immediate effect. Prior to the General Meeting, the Board in place at that time approved and made payments of
£62,772 to forfeit 9,460,000 unexpired share options, which are included in the table above.
Share Option Schemes
DSOS
The DSOS is made up of two parts. Options to acquire ordinary shares in the Company granted under Part A are ‘Approved Options’ and
options to acquire Shares granted under Part B of the DSOS are ‘Unapproved Options’. No consideration shall be payable for the grant of
an Option.
No options were granted under the DSOS in 2017 (2016: nil). For DSOS options to vest there has to be an increase in the Group’s
Earnings Per Share (‘EPS’) growth over the performance period measured over the 3 consecutive calendar years commencing from the
date the options were granted. The weighted average fair value of options granted during the year under the DSOS was nil per option
(2016: nil).
PSP
PSP are granted to Executive Directors and senior management. Executive Directors and senior management receive awards under the
2010 Performance Share Plan in the form of nil cost options. No consideration is required to be paid for the grant or exercise of an
Option.
No share options were granted under PSP in 2017 (2016: 711,250). The PSP options provide a conditional right to acquire shares at nil
cost subject to the satisfaction of the performance conditions and continued employment with the Group. For these options to vest a
comparison is performed between the Group’s TSR against the FTSE Fledgling index (half the options) (2016: FTSE Fledgling index) and
the All-Share Oil & Gas Producers index (other half of options). The weighted average fair value of options granted during the year
under the PSP was 0.0p per option (2016: 5.84p).
Fair value of share options granted
The fair value of options granted under the PSP in 2016 was estimated as at the date of the grant using a variant of the Monte Carlo
model, taking into account the terms and conditions upon which the options were granted, which includes the performance condition
related to the TSR directly. No dividends are paid on shares under the scheme prior to exercise.
The total share based payment credit for the year was $0.05m (2016: charge of $0.05m).
The following table lists the inputs to the model used for the options granted in the year ended 31 December 2016. The expected future
volatility has been determined by reference to the historical volatility.
143
JKX Oil & Gas plc Annual Report 2017
Dividend yield
Expected share price volatility
Risk free interest rate
Exercise price
Expected life of option (years)
Weighted average share price
2016
PSP
0.0%
82%
0.6%
0.0p
3.0
19.3p
Bonus scheme
The full details of the bonus performance criteria for Directors and senior employees and the bonus earned is explained in the
Remuneration Report on pages 61 to 73.
I. Auditors’ remuneration
Audit services
2017
$000
2016
$000
Fees payable to the Company’s auditors for the audit of the parent company
42
40
J. Directors’ remuneration
The remuneration of the Directors is disclosed in the audited section of the Remuneration Report on pages 61 to 73, which form part of
these financial statements.
K. Dividends
No interim dividend was paid for 2017 (2016: nil). In respect of the full year 2017, the directors do not propose a final dividend (2016: no
final dividend paid).
L. Operating lease commitments
At the reporting date, the Company’s aggregate future minimum commitments under non-cancellable operating leases in respect of
properties as follows:
Within one year
In the second to fifth years inclusive
M. Employees
2017
$000
332
932
1,264
2016
$000
319
1,276
1,595
There were no employees of the Company during the year (2016: none). Staff costs are met by group company JKX Services Ltd.
N. Events after the reporting date
See Note 35 to the consolidated financial statements.
144
JKX Oil & Gas plc Annual Report 2017
Directors and advisers
Directors
Hans Jochum Horn
Adrian Coates
Michael Bakunenko
Christian Bukovics
Vladimir Rusinov
Andrey Shtyrba
Vladimir Tatarchuk
Company Secretary
Prism CoSec Limited
42-50 Hersham Road
Walton-on-Thames
Surrey, KT12 1RZ
Registered office
6 Cavendish Square, London W1G 0PD
Registered in England
Number: 3050645
Registrars
Equiniti
Aspect House, Spencer Road
Lancing, West Sussex BN99 6DA
Solicitors
Cleary Gottlieb Steen & Hamilton
2 London Wall Place
London EC2Y 5AU
Independent auditors
PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
1 Embankment Place, London WC2N 6RH
Financial advisors
SPARK Advisory Partners Limited
5 St. John’s Lane
London
EC1M 4BH
Public relations
EM Communications
25 Southampton Buildings
London, WC2A 1AL
General information
Glossary
2P reserves
Proved plus probable
3P reserves
Proved, probable and possible
P50
AFE
AIFR
Bcf
Bcm
bcpd
boe
Reserves and/or resources estimates that
have a 50 per cent probability of being met or
exceeded
Authorisation For Expenditure
All Injury Frequency Rate
Billion cubic feet
Billion cubic metres
Barrel of condensate per day
Barrel of oil equivalent
boepd
Barrel of oil equivalent per day
bopd
bpd
bwpd
cfpd
EPF
FEN
GPF
HHN
Barrel of oil per day
Barrel per day
Barrels of water per day
Cubic feet per day
Early Production Facility
Folyópart Energia Kft
Gas Processing Facility
HHE North Kft
Hryvnia
The lawful currency of Ukraine
HSECQ
HTHP
KPI
LIBOR
LPG
LTI
Mbbl
Mboe
Mcf
Mcm
Mstb
MMcfd
MMbbl
MMboe
MMstb
PPC
Psi
Health, Safety, Environment, Community and
Quality
High Temperature High Pressure
Key Performance Indicator
London InterBank Offered Rate
Liquefied Petroleum Gas
Lost Time Injuries
Thousand barrels
Thousand barrels of oil equivalent
Thousand cubic feet
Thousand cubic metres
Thousand stock tank barrels
Million cubic feet per day
Million barrels
Million barrels of oil equivalent
Million stock tank barrels
Poltava Petroleum Company
Pounds per square inch
Roubles
The lawful currency of Russia
RR
sq. km
TD
$
UAH
US
VAT
YGE
Russian Roubles
Square kilometre
Total depth
United States Dollars
Ukranian Hryvnia
United States
Value Added Tax
Yuzhgazenergie LLC
Conversion factors 6,000 standard cubic feet
of gas = 1 boe
JKX Oil & Gas plc Annual Report 2017
Designed and produced by DB&CO www.dbandco.co.uk,
Board photography Harriet Birt and Tamás Korchmáros
Cover photography Monty Rakusen
Printed in the UK by Pureprint Group Ltd.
The report is printed on Amadeus 50 Recycled Silk which is produced with
50% recycled fibre from both pre and post-consumer sources, together with
50% virgin fibre from sustainable forests independently certified according to
the rules of the Forest Stewardship Council. All pulps used are Elemental Chlorine
Free (ECF) and the manufacturing mill is accredited with ISO 14001 standard for
environmental management.
JKX Oil & Gas plc
JKX Oil & Gas plc
6 Cavendish Square
London W1G 0PD
+44 (0)20 7323 4464